A Look at the Penalties for Broker/Dealer Failure to Obtain Due Diligence Under FINRA 10-22

A Look at the Penalties for Broker/Dealer Failure to Obtain Due Diligence Under FINRA 10-22

In December of last year, in a blog post titled “FINRA’s Sanction of Broker/Dealers for Lack of Conducting Reasonable Due Diligence”  I wrote about recent FINRA sanctions of broker/dealers for failure to conduct reasonable due diligence in accordance with FINRA 10-22.  Coral Capital Partners, which conducts due diligence in accordance with FINRA Regulatory Notice 10-22,  has been monitoring the enforcement actions in this area, and  I thought it would be a good idea to take a closer look at the fines and penalties FINRA sanctioned these firms with.

The broker/dealers that were sanctioned under FINRA 10-22  include:

  1. Next Financial Group, Inc. of Houston, Texas was ordered to pay $2 million in restitution and fined $50,000.  It should be noted that Next Financial’s Vice-President was suspended as a principal and ordered to pay a $10,000 fine.
  2. Investors Capital Corporation of Lynnfield, MA was ordered to pay roughly $400,000 in restitution to customer who sustained losses.
  3. Garden State Securities of Redbank, NJ. and the owner of the firm were ordered to pay restitution of $300,000 to customers who sustained losses.  Additionally the owner of the firm was suspended for 20 days in any capacity, and an additional 2 months in a supervisory capacity as well as fined an additional $25,000.  The firm’s chief Compliance Officer was suspended for one month in a principal capacity and fined $10,000.
  4. Capital Financial Services of Minot, ND. was ordered to pay $200,000 in restitution to customers who sustained losses.  Additionally a former principal was fined $10,000 and suspended in a principal capacity for 6 months.
  5. National Securities Corporation of Seattle, WA was ordered to pay $175,000 in restitution to customers who sustained losses, and the Director of Syndication and Alternative Investments was suspended in a principal capacity for 6 months and fined $10,000.
  6. Equity Services, Inc. of Montpelier, VT. was censured and fined $50,000 and ordered to pay nearly $164,000 in restitution to customers who sustained losses.  Additionally a Senior Vice President for Securities Operations was fined $10,000 and suspended from association with any FINRA regulated firm in any capacity for 30 days.  A registered representative was fined $30,000 and suspended from association with any FINRA regulated firm in any capacity for 30 days.
  7. Securities America, Inc. of La Vista, NE. was censured and fined $250,000 in connection with its failure to conduct or obtain due diligence on private palcements that it sold to customers.
  8. Newbridge Securities Corporation of Fort Lauderdale, FL. was fined $25,000 for its failure to conduct or obtain due diligence.  Additionally the former Chief Compliance Officer was suspended in any principal capacity for six months and fined $15,000.
  9. Workman Securities, Corp. of Minnesota was ordered to pay $700,000 in restitution to customers.
  10. Askar Corporation of Minnesota was fined $45,000 for its failure to conduct or obtain due diligence.

It should be noted that in several of the actions above, FINRA ordered restitution to be paid to customers to compensate for losses; and in several cases individuals where fined and suspended as well.  For smaller broker/dealers these fines and restitution orders can easily put them out of business, and for many individuals a fine or suspension can easily be the end of a career.

If a syndicate member or company that is seeking to raise funds isn’t wiling or able to undergo a FINRA 10-22 due diligence review,  then maybe it isn’t a private placement that should be participated in.

www.coralcapital.com

If you have any questions about the above blog post, please feel free to visit our web site, www.coralcapital.com and check out we have to offer.  Feel free to contact us if you have any questions.  We can be reached at 404-816-9220 and are always willing to speak with you.

About Coral Capital Partners

Coral Capital Partners is an independent consulting and advisory firm focused on companies and participants in the lower and middle markets. We partner with our clients to provide cost effective solutions to real world issues and situations. Our experienced team brings a diverse set of skills that allows us to service a wide variety of needs.  Our area of services and expertise focuses on bringing services and solutions to our clients that are normally only available to much larger firms.

Coral Capital Partners, Inc.  provides services to Investment Banks,  Private Equity Funds, investors, and both privately held and publicly traded companies, as well as various stakeholders in those organizations.  This has included international public companies with operations on three (3) continents to smaller privately held domestic companies.

Our experience in the areas of corporate advisory, due diligence reviews, and regulatory compliance allows for a cost effective and efficient solution to the issues at hand.  Please feel free to contact our offices to see how we may be of assistance.

SEC Launches Investigation of Alleged Stock Manipulation by PIPE Issuer Sun River Energy

Coral Capital Partners was mentioned in the article below, which was originally published in the January 11th, 2012 edition of the PIPE’s Report.

SEC Launches Investigation of Alleged Stock Manipulation by PIPE Issuer Sun River Energy

Allegations Made in Documents Subpoenaed by SEC in Sun River’s Litigation With Nova Leasing

By Dan Lonkevich
January 11, 2012 5:44 AM PST

The Securities and Exchange Commission has opened an investigation of alleged stock manipulation by PIPE issuer Sun River Energy (SNR) in connection with its strategy of suing to take back shares of restricted stock from contractors and at least one PIPE investor.

The probe came to light because the SEC issued a subpoena to Robert Fowler, the chief executive officer of Nova Leasing, a Casper, Wyoming-based oil and gas company embroiled in litigation with Dallas-based Sun River.

Sun River has denied the allegations of stock manipulation.

Fowler said his attorney, Tobin Kern of the law firm Sherman and Howard in Denver, had received the subpoena and was handling it for him. The SEC was asking for “the general paperwork around the litigation between Sun River and Nova Leasing,” he said. Kern couldn’t be reached for comment.

The SEC would neither confirm nor deny the issuance of the subpoena, or the existence of a probe.

On March 10 of last year, Sun River filed a lawsuit in Texas state court against Nova Leasing and Securities Transfer in a dispute involving a series of transactions between Nova and Sun River, in which Nova received 1.2 million shares of Sun River stock.

Sun River was seeking the return of the 1.2 million shares plus damages and attorneys’ fees from Nova Leasing, based on claims of unjust enrichment and breach of contract.

Nova filed a countersuit against Sun River in federal court in Denver, over the company’s refusal to register and transfer the shares.

Nova claims that Sun River filed its lawsuit in retaliation for Nova’s refusal in April of 2010 to accept a lock-up agreement that would have limited its ability to sell the stock and its refusal in September 2010 to agree to Sun River’s demand to “get out of the market” for the company’s stock.

At the time, Sun River and two companies controlled by Harry McMillan, a major shareholder of the company, were trying to “artificially inflate the price of Sun River’s stock for their own pecuniary benefit,” Nova’s countersuit said.

McMillan controls two companies, Cicerone Corporate Development and J.H. Brech, that together hold about 13.8% of Sun River’s stock. Sun River put McMillan in charge of its investor relations, corporate governance and capital-raising efforts in 2009, according to Nova.

In December, Sun River cut ties with McMillan and Cicerone for allegedly disclosing confidential information about Sun River to a third party. Sun River also is suing McMillan to take back $1.7 million in short-swing profits McMillan made when he sold a company he controlled that owned Sun River shares. Sun River CEO Donal Schmidt Jr. also has said the company may file suit to take back shares from McMillan.

Neither Schmidt nor McMillan could be reached for comment.

Nova claimed that in September 2010, McMillan told Fowler that if Nova didn’t immediately “‘get out of the market’ for Sun River shares, McMillan and Sun River would ‘deal with the situation with you’ and ‘God damn make sure’ that Nova’s shares of Sun River stock would not be cleared for sale on the open market ‘for the next two or three years.'”

McMillan allegedly carried out that threat in November 2010 and January 2011, instructing Sun River’s transfer agent not to clear for sale any shares held by Nova or by Fowler’s wife, Sharon K. Fowler.

Sun River filed similar lawsuits against Kevin Paul of LPC InvestmentsMirador Consulting, and Erik Nelson, of Coral Capital Partners. The company lost in its effort to force Paul and LPC Investments to give back their Sun River shares; eventually the company found someone to purchase the shares from Paul and LPC. Last month, Sun River settled its litigation with Mirador for undisclosed terms.

Sun River failed to disclose any of this litigation to PIPE funds who invested $10 million in a private placement of preferred convertible stock in December 2010 and January 2011. The PIPE investors included Centaur Value FundSherbrook PartnersNext View Partners,Seaside 88, Warburg Opportunity Trading Fund, Brio Capital, Micro PIPE Fund, Fairfield Investment and Bank of Guttenberg.

UPDATE:

Coral Capital Partners was awarded a judgment in its favor against Sun River Energy, Inc. following a trial on October 23rd, 2013.  Please see our blog entry “Coral Capital Partners Victorious in Sun Energy Litigation” for a further explanation of the trial, and how Sun River dropped all of its claims prior to trial. It should also be noted that the District Court Judge ruled in our favor in the dispute over the proposed settlement, and our decision to not enter into what was a clearly one-sided agreement.

About Coral Capital Partners

Coral Capital Partners is an independent consulting and advisory firm focused on companies and participants in the lower and middle markets. We partner with our clients to provide cost effective solutions to real world issues and situations. Our experienced team brings a diverse set of skills that allows us to service a wide variety of needs.  Our area of services and expertise focuses on bringing services and solutions to our clients that are normally only available to much larger firms.  Coral Capital Partners, Inc.  provides services to Investment Banks,  Private Equity Funds, investors, and both privately held and publicly traded companies, as well as various stakeholders in those organizations.  This has included international public companies with operations on three (3) continents to smaller privately held domestic companies.  Our experience in the areas of corporate advisory, due diligence reviews, and regulatory compliance allows for a cost effective and efficient solution to the issues at hand.  Please feel free to contact our offices to see how we may be of assistance.

Sun River Energy’s Auditor Resigns

Sun River Energy’s Auditor Resigns

By Dan Lonkevich
January 09, 2012 3:13 AM PST

Sun River Energy (SNRV), the PIPE issuer that is involved in multiple lawsuits to take back restricted stock from contractors and other investors, said its auditor LBB Associates Ltd.LP resigned on Dec. 21.

The oil and gas company offered no explanation for the resignation.

The announcement was made in a securities filing on Dec. 29 in which Sun River also said it expects to complete a search for a replacement within two weeks.

Dallas-based Sun River said in the filing that during its two most recent fiscal years ended April 30, 2010 and 2011, LBB’s reports on the company’s financial statements did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.

Sun River reported a $7.3 million net loss in the fiscal year end April 30, 2011, compared with a loss of $3.3 million, in the same period of 2010. For the six months ended Oct. 31, 2011, Sun River posted a net loss of $5.5 million, compared with a loss of $1.5 million, a year earlier.

“There were no disagreements between the company and LBB on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of LBB would have caused LBB to make reference to the subject matter of the disagreement in connection with its reports on the company’s financial statements,” Sun River said in the filing.

Representatives of Sun River and of LBB couldn’t be reached for comment.

Sun River shares fell 13.8%, or 20 cents, to $1.25 on Jan. 6. They have traded as high as $5.17 and as low as 51 cents over the past year.

The resignation of Sun River’s auditor comes as the company has begun to sever ties with Harry McMillan, a former consultant and major shareholder. The company accuses him of disclosing confidential information to a third party. Sun River also has said it intends to sue McMillan and his consulting firm Cicerone Corporate Development to take back $1.7 million in illegal short-swing profits.

McMillan was the driving force in Sun River’s strategy of suing contractors and other investors to take back shares of restricted stock. In several countersuits filed against Sun River, those contractors and investors have accused McMillan and Sun River of stock manipulation by using litigation to prevent investors from selling shares on the open market.

The company has denied the allegations of stock manipulation. It settled in one of the lawsuits in December. The terms of the settlement with Mirador Consulting were not disclosed.