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Regulatory Sanctions

Selling Private Securities in a Ponzi Scheme [Part One]

April 17, 2019

by Howard Haykin


In April, FINRA reported sanctions against 4 brokers who admitted to selling Promissory Notes issued by the Woodbridge Group of Companies, a company that shut down its business in December 2017 when SEC investigators closed in. WHY? The company, which billed itself out (among other things) as a real estate consulting company, was a $1.2 billion Ponzi scheme that targeted thousands of retail investors, many of them seniors.
Suffice it to say, none of the 4 brokers provided notice to their member firms prior to participating in these private securities transactions.



MSI Financial Services/MML Investment Services broker was BARRED from the industry … for selling $3.5 million in promissory notes to 13 investors, 11 of whom were Firm customers. The sales, which took place between July 2016 and December 2017, netted the broker $104,000 in commissions. He had 25 years’ experience when discharged by MML.  [FINRA AWC #2018058504901]



Foresters Equity Services broker was BARRED … for selling $2.7 million in promissory notes to 21 investors, 7 of whom were Firm customers. The sales, which took place between August 2016 and July 2017, netted the broker $110,000 in commissions. He had 13 years’ experience when discharged by FES.  [FINRA AWC #2018057766401]



Farmers Financial Solutions broker was SUSPENDED (1 month), FINED ($5K), DISGORGED ($1.5K) … for selling a $50,000 promissory note to one investor. The sale took place in October 2017. This broker had the misfortune of also personally investing $240,000 in Woodbridge promissory notes. He had 18 years’ experience when discharged by FFS.  [FINRA AWC #2018059666301]



Hornor, Townsend & Kent broker was SUSPENDED (5 months), FINED ($5K), DISGORGED ($5K) … for selling $250,000 in promissory notes to 3 investor Firm customers, one of whom was a Firm customer. The sales took place between May 2016 and July 2017. Prior to this violative conduct and being discharged by HTK, this broker had never committed a violation in his 46 year brokerage career.  [FINRA AWC #2018058498401]



All the above brokers violated FINRA Rule 3280(b), which states that prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which they are associated describing in detail the proposed transaction and their role therein and stating whether they have received or may receive selling compensation in connection with the transaction.



These cases were reported in FINRA Disciplinary Actions for April 2019.

For further details, go to ...  FINRA Disciplinary Actions Online, and refer to the Respective Case Numbers.