TAG | third-party private placement offerings
Brookstone Securities, Inc. and Brokers Censured and Fined by FINRA in Two Separate Cases Involving Private Placements
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The following appeared on FINRA’s website in the ’Disciplinary Actions.’
Brookstone Securities, Inc. (CRD #13366, Lakeland, Florida) and David William Locy (CRD #4682865, Registered Principal, Overland Park, Kansas)
the firm and Locy were censured and fined $25,000, jointly and severally. Without admitting or denying the findings, the firm and Locy consented to the described sanctions and to the entry of findings that the firm, acting through Locy, did not have WSPs addressing due diligence requirements for third-party placements.
These findings stated that the firm, acting through Locy, failed to conduct an adequate due diligence of a third-party private placement offering before Locy approved the offering of shares to customers. The findings also stated that Locy’s due diligence efforts did not include any investigation into an equity fund, despite acknowledging that he knew very little about it or the third-party placement and could not get any solid information about the fund, including pending litigation or financial statements.
These findings also included that Locy knew nothing about the fund that was not contained in a PPM the issuer prepared, but accepted that the firm representatives forming the offering had conducted due diligence and relied on their opinion of the fund.
Additionally, FINRA found that Locy acknowledged the representatives had limited, if any, experience forming a private placement. FINRA also found that firm representatives sold or participated in sales of shares to customers without notifying Locy or anyone else at the firm, which caused those sales to not be recorded on the firm’s books and records. (FINRA Case #20090198373)
Brookstone Securities, Inc. (CRD # 13366, Lakeland, Florida), Richard Joseph Buswell (CRD #4770105, Registered Representative, Lafayette, Louisiana) and Herbert Steven Fouke (CRD #5523938, Registered Representative, Lafayette, Louisiana)
respondents in a FINRA complaint alleging that the firm, acting through Buswell andFouke, made misrepresentations and/or omissions of material fact in connection with the sale of unsecured bridge notes and warrants. The complaint alleges that Buswell and Fouke, acting on the firm’s behalf, told purchasers of the bridge notes that they were guaranteed without any reasonable basis given the description of the placement agent’s limited role in the Private Placement Memorandum (PPM) and disclosed no risks regarding the financing or financial health of the placement agent or the issuer of the bridge notes and warrants.
Additionally, the complaint alleges that Buswell and Fouke provided unwarranted price predictions to customers regarding the future price of common stock for which warrants would be exchangeable. The complaint further alleges that Buswell and Fouke, acting on the firm’s behalf, guaranteed the payment at maturity of promissory notes although the PPM made clear that the placement agent had no commitment to provide financing for the private placement or a later public offering.
The complaint alleges that Buswell and Fouke, acting on the firm’s behalf, recklessly or knowingly failed to disclose the risk that the financing would not occur and recklessly or knowingly failed to disclose the other risks outlined in the PPM. The complaint alleges that Buswell and Fouke, acting on the firm’s behalf, guaranteed to customers that they would receive back their principal investments plus returns, failed to inform investors of any risks associated with the investments and did not discuss the risks outlined in the PPM that could result in investors losing their entire investment. The complaint also alleges that the firm, acting through Buswell, made misrepresentations and/or omissions of material fact in connection with the sale of the private placement of firm units consisting of Class B common stock and warrants to purchase Class A common stock to customers; the PPM for the firm self-offering stated that the investment was speculative, involving a high degree of risk and was only suitable for persons who could risk losing their entire investment, and the PPM also stated that the investment was illiquid, contrary to Buswell’s representations.
Also, the complaint further alleges that Buswell represented to customers that he would invest their funds in another private placement, and in direct contradiction, invested the funds in the firm’s private placement. In addition, the complaint alleges that the firm, acting through Buswell and Fouke, recommended and effected the sale of securities without having a reasonable basis to believe that the transactions were suitable given the customers’ financial circumstances and conditions; Buswell recommended a trading strategy that relied upon frequent trading, use of margin and concentration of the accounts in a small number of financial stocks. The complaint alleges that Buswell exercised discretion in customers’ accounts without the customers’ prior written authorization or the firm’s acceptance of the accounts as discretionary. The complaint also alleges that the firm, acting through its chief executive officer (CEO) and its president, failed to reasonably supervise Buswell, and failed to follow up on red flags that should have alerted them to the need to investigate Buswell’s sales practices and determine whether trading restrictions, heightened supervision or discipline were warranted. The complaint further alleges that the firm, acting through its CEO, president and chief compliance officer, failed to establish, maintain and enforce supervisory procedures reasonably designed to prevent violations of NASD Rule 2310 regarding suitability; the firm’s procedures were also inadequate to prevent and detect unsuitable recommendations resulting from excessive trading, excessive use of margin and over-concentration. The complaint alleges that the firm’s new account application process was flawed so that a reviewing principal was unable to obtain an accurate picture of customers’ financial status, investment objectives and investment history when reviewing a transaction for suitability. The complaint also alleges that the firm’s procedures failed to identify specific reports that its compliance department was to review and provided no guidance on the actions or analysis that should occur in response to the reports.(FINRA Case #2009017275301)
This information appeared on FINRA’s website in the ‘Disciplinary Actions, 2011.’
Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member have experienced a loss through Brookstone Securities, Inc., and/or David W. Locy, Richard J. Buswell, Herbert S. Fouke, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses. To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com.
Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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