Carolina Financial Services, a FINRA member since 1997 headquartered in Brevard, North Carolina, engages in private placement offerings via 15 registered reps operating out of 4 locations. The firm and Bruce Victor Roberts (the firm’s founder, CEO, and COO) were charged by FINRA’s Department of Enforcement in a Complaint alleging fraudulent misrepresentations and omissions in the sale of securities, violations of suitability rules, and misleading advertising materials, and failure to enforce supervisory procedures. Department of Enforcement v. Carolina Financial Securities, LLC, et al., No. 2014040295201 (Apr. 29, 2015).
According to the Complaint, from February 14, 2014 through February 21, 2014, Carolina Financial Services, LLC, via Bruce Victor Roberts, sold roughly $2.5M of 13.5% senior secured notes via a $5M offering to 18 clients, apparently for purposes of raising capital for a dental and medical supply firm. The Complaint indicated that Carolina had failed to conduct adequate due diligence regarding the offering. Rather, the firm had created and provided investors with sales literature containing misrepresentations of the risk factors involved in the investment, the financial status of the issuer, contract values, expenses and investment fees. The Complaint reported that the aforementioned $5M was connected to a $150M mass fraud that was stopped after the dental and medical supply firm’s president was arrested and pled guilty to wire fraud.
Securities brokers and dealers must have an adequate and reasonable basis in order to recommend a security. In connection with recommendations, securities dealers “owe a special duty of fair dealing to their clients.” This “special relationship” exists because the securities broker or dealer “implicitly represents he has an adequate basis for the opinions he renders.” A stockbroker cannot recommend a security unless there is an adequate and reasonable basis for such recommendation. These duties have been described as implicit warranties of the soundness of the stock, in terms of value, earning capacity, and the like. In fact, the failure to disclose information in contravention of the warranty is tantamount to an omission of a material fact. Where the salesman lacks essential information about a security, he should disclose this as well as the risks which arise from his lack of information.
Moreover, a securities broker dealer cannot avoid responsibility for unfounded statements of a deceptive nature, recklessly made, merely by characterizing them as opinions or predictions or by presenting them in the guise of a probability or possibility. Where the prospective buyer is not informed of known or readily ascertainable adverse information; he is not cautioned about the risks inherent in purchasing a speculative security; and he is left with a deliberately created expectation of gain without risk. Courts have held such conduct to be actionable.
FINRA alleged in the Complaint that Carolina and Robert had willfully violated Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, FINRA Rules 2010 and 2020. In the alternative, FINRA alleged that Roberts and Carolina have violated FINRA Rule 2010 by way of contravening Section 17(a) of the Securities Act of 1933. FINRA further claimed that Carolina’s failure to conduct due diligence left the firm without an adequate basis to recommend offerings to clients, conduct which FINRA claimed violated FINRA Rules 2111(a) and 2010. FINRA alleged in the Complaint that Carolina’s conduct of providing misleading and inaccurate sales literature was violative of FINRA Rules 2210 and 2010. Carolina and Roberts’ supervisory failures concerning suitability and due diligence, according to FINRA, was violative of FINRA Rule 2010 and NASD Conduct Rules 3010(a) and 3010(b).
On May 26, 2017, a FINRA Hearing Panel issued an 86 page Extended Decision cismissing Enforcement’s allegations that (1) Carolina and Roberts knowingly or recklessly made material misrepresentations or omissions in the IMGF Offering Materials in violation of Section 10(b) ofthe Exchange Act, Rule 10b-5 thereunder and FINRA Rules 2010 and 2020; (2) Roberts negligently made material misrepresentations in the IMGF Offering Materials in contravention ofSection 17(a) ofthe Securities Act and in violation ofFINRA Rule 2010; (3) Roberts recommended unsuitable securities in violation ofFINRA Rules 2111(a) and 2010; and (4) Carolina and Roberts failed to enforce Carolina’s WSPs in connection with the supervision of Carolina’s Due Diligence on the IMGF Notes.
The Heaing Panel did find that Respondent Carolina Financial Securities, LLC, (1) made material
misrepresentations in the IMGF Offering Materials in contravention of Section 17(a) of the Securities Act and therefore in violation ofFINRA Rule 2010; (2) making material misrepresentations in the IMGF Offering Materials in violation ofFINRA Rules 2210(d)(1) and2010; and (3) recommending unsuitable securities in violation ofFINRA Rules 2111(a) and 2010.
Carolina Financial Securities was fined $60,000.
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