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ARI Financial Services, Inc., a FINRA member firm since 2005 headquartered in Kansas, sells private placements directly to investors among other securities via 30 registered reps operating out of 5 branch offices. The firm, along with president and CCO William Candler, were charged by FINRA’s Department of Enforcement in a Complaint alleging various supervisory failures pertaining to private placements which included certain of the firm’s offerings to customers which turned out to be a Ponzi scheme. Department of Enforcement v. ARI Financial Services, Inc., et al., No. 2010023883601 (Filed May 14, 2015).
According to the Complaint, ARI and Candler (also ARI’s majority owner), had facilitated a minimum of 10 offerings for private placements from September 1 of 2009 through December 31 of 2013. During this period, according to the Complaint, the firm had registered the employees of the issuers of such private placements to be independent contractors for purposes of executing the marketing and wholesaling activities for the private placement offerings. The Complaint indicated that ARI designated compliance responsibilities to the issuers’ staff which included responsibilities to supervise the promotion and sale of the issuer’s securities.
The Complaint stated that ARI had failed to establish/maintain an adequate supervisory system for purposes of ensuring that the supervisory responsibilities were being properly exercised by the aforementioned individuals. Candler, according to the Complaint, acted in the capacity of registered principal whose responsibilities included establishing and maintaining ARI’s written procedures and policies.
The Complaint noted the failure of ARI to identify and prevent imbalanced and misleading sales and advertising materials from being disseminated by the issuer representatives, including failing to make sure that the private placement offering materials that the issuers prepared and distributed had contained accurate and sufficient disclosures. FINRA, via the Complaint, indicated that ARI had failed to prevent solicitation of such unregistered securities under Regulation D’s Rule 506 exemption.
A private placement is generally the offer or sale of unregistered securities that are not the subject of a registration statement filed with the United States Securities and Exchange Commission pursuant to the Securities Act of 1933.
The subject of a private placement is only limited by one’s imagination, and can include real estate, common stock, warrants, bonds, hedge fund interests, orange groves, timberland, tax liens, structured settlements, Ponzi schemes, or simply fraudulent promissory notes or promises to pay by your broker.
However, generally, to meet the requirement of the private placement exemptions under the Securities Act or Regulation D, depending upon the size of the offering, and the number of non-accredited investors, an issuer is required to make some form of disclosure regarding the nature, character and risk factors of the securities being offered. Depending upon these same factors, however, an issuer may not even be required to provide prospective investors with audited financial statements. However, while a private placement may be exempt from registration, it is nonetheless subject to the anti-fraud provisions of the federal securities laws.
In some cases, however, investors do not purchase private placements on their own initiative, investors are sold or recommended private placements by their stockbrokers or investment professionals, sometimes with, or most often without the knowledge or approval of their brokerage firm. In many cases, these brokerage firms are responsible for these unapproved activities under a variety of legal theories including vicarious liability as the agent or employee of the brokerage firm, as a control person of the broker, or based upon the brokerage firm’s failure to supervise the activities of its registered representatives or stockbrokers.
According to the Complaint, Candler had failed to conduct adequate due diligence in a private placement that his firm sold directly to the investor base. This private placement, according to FINRA, ended up being considered a Ponzi scheme. FINRA alleged that a minimum of 7 of ARI’s customers who had purchased such interests in the private placements from issuer representatives lost principal amounting to roughly $560,000 in the aggregate.
Additionally according to the Complaint, Candler did not establish any legitimate supervisory procedure for ARI’s medallion signature guarantees, a process designed to guarantee authenticity of investors’ signatures that appear on securities transfer documents. In this case, according to the Complaint, Candler would provide signature guarantees on pre-signed securities assignment forms notwithstanding the fact that he had no way to conclude the signatures were authentic.
The Complaint alleged that Candler’s failure to put in place and maintain an adequate supervision system with written supervisory procedures warrant violations of FINRA Rule 2010, NASD Rules 3010, 2210, 2310, 3110, along with Section 17(a) of the Securities Exchange Act of 1934 and SEC Rule 17a-4. Candler is personally alleged to have violated FINRA Rule 2010 and NASD Rules 3010, 2210, 2310, and 3110.
Guiliano Law Group
If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.