[author: Gregory J. Nowak]
In a recent enforcement action by the Securities and Exchange Commission (SEC), the SEC barred a ‘consultant’ from soliciting private-placement investors and selling away from his associated brokerage firm. In the latest case (available at http://www.sec.gov/litigation/admin/2012/34-67532.pdf), an individual who was a registered representative of a licensed broker dealer (the individual had Series 7 and 63 licenses) solicited investors to invest in PIPEs for two pink sheet-listed foreign companies. He attempted to do so as a “consultant” and “finder” outside of the supervision of his registered brokerage firm. He collected transaction-based compensation.
The first firm foundered, collapsing due to reports of fraud by its CEO, and the investors lost money. The second firm is unnamed and there is no allegation of fraud nor recitation of investors’ losses.
The SEC alleged that the representative tried after the fact to “paper over” the violation with a back-dated consulting agreement. He even had his brokerage firm— also after the fact—sign the consulting agreement in exchange for a part of the proceeds. The SEC saw right through those efforts.
The representative was found by the SEC to have willfully violated Section 15(a) of the Securities Exchange Act of 1934, which makes it unlawful to effect any transaction in or induce or attempt to induce the purchase or sale of any security unless such broker is registered or associated with a registered broker-dealer.
The fact that the representative had the appropriate licenses and the fact that he was associated with a registered broker-dealer was not enough – the SEC wanted to see active supervision of the representative by the licensed entity, and that meant the transactions should have been run through the registered broker-dealer. Having a broker-dealer “somewhere on the scene” is not enough.
Pepper Points
The one interesting note was the statement by the SEC in passing that the defendant’s activities “… exceeded that of any ‘money finder’ and thus required broker-dealer registration.” That statement is at least an acknowledgement of the existence of the money finder concept. It is clear, however, that once registered, a licensed representative cannot rely on the money finder exception without first involving his or her firm and letting the firm decide if it is appropriate for the brokerage to supervise such activity.
The individual was required to disgorge all fees received as a penalty (no tax deduction) and also had to pay prejudgment interest and civil penalties to the SEC, and he was barred from the industry for two years. Interestingly enough, the brokerage firm was not cited for a failure to supervise.
