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Firm U5’s Broker Over Outside Business Activities (Or Was it Private Securities Transactions?)
[Image: Stairwell Painting by M.C. Escher]
by Howard Haykin
WHAT WENT WRONG. In September 2014, the broker entered into an agreement with a company to participate in a private offering of its convertible notes. FINRA does not identify the firm, but simply notes that the broker was not otherwise affiliated with this company. [For the record, I surmise that the unidentified company is, once again, Elan Alternative Group.]
Thereafter, …
- From September through December 2014, the broker marketed the convertible notes offering ("private securities transaction" or "PST").
- The broker introduced a venture capital fund to the company. The VC fund, not a Flying Cloud client, invested $200,000 in the company.
- In January 2015, the broker arranged for an offering to be placed on a crowdfunding website, which raised $150,000 by month-end, including $1,000 invested by the broker, himself.
- The broker received $17,500 from the company for his participation in these investments.
- At no time did the broker provide written notice to, or obtained written permission from, Flying Cloud to participate in these investments.
FINANCIALISH TAKE AWAY. There's plenty of confusion to go around in this case.
- Whether the broker violated FINRA's rules for OBAs and/or PSTs.
- Whether the broker adequately explained to Flying Cloud what services he would provide to Elan Alternative Group.
- Whether the broker understood that ... (i) marketing an issuer's securities, (ii) assisting with an issuer's crowdfunding site, and (iii) making a person investment are all considered participations in PSTs, or private securities transactions.
What's not confusing is FINRA's take on the violations and its sanctions against this broker: $5K in fines, $17.5K in disgorgement of commissions, and a 3-month suspension.
This case was reported in FINRA Disciplinary Actions for January 2019.
For further details, go to ... FINRA Disciplinary Actions Online, and refer to Case #2015045185501.
