Securities broker dealer CFD Investments Inc. and its Chief Compliance Officer Matthew O. Bahrenburg of Kokomo Indiana have been sanctioned by Financial Industry Regulatory Authority (FINRA) based upon findings that they failed to conduct due diligence on an oil and gas private placement and that the securities broker dealer’s stockbrokers made unsuitable investment recommendations to customers who experienced losses. Letter of Acceptance Waiver and Consent No. 2018057457101 (Aug. 24, 2020).
According to the AWC, interests in Payson Petroleum Inc. had been sold to CFD customers through a private placement. Payson Petroleum and affiliated Payson Operating LLC began operations in 2011. Millions of dollars were raised by Payson through limited partnership offerings. Investors were induced into purchasing these securities in part based on Payson’s pledge to commit up to 20 percent of its own assets to meet required capital.
Payson was subject of an investor lawsuit in June of 2012 where the company was accused of misusing investment proceeds and making misrepresentations with regard to the use of investor funds. In April of 2014, Payson was found by a jury to have engaged in real estate fraud and securities fraud. The jury determined that misrepresentations had been made concerning Payson’s financial status as it pertained to the drilling and completion of an oil fund. The company’s experience in the energy sector was also misrepresented. In October of 2015, that investor was provided with $3,300,000.00 to resolve the matter.
The AWC also indicated that Payson filed for bankruptcy in June of 2016 following its final offering. By November of 2016, Payson was subject of a Securities and Exchange Commission (SEC) Complaint which alleged misrepresentations and omissions as well as fraudulent actions by Payson relating to its offerings. Payson principals were ordered by the regulator to pay $7,700,000.00 in fines and disgorgement.
The AWC stated that Bahrenburg neglected to comply with due diligence as it pertained to Payson offerings sold through stockbrokers at CFD. The offerings were approved by Bahrenburg for accredited investors despite Bahrenburg and CFD having failed to investigate the financial condition of the oil and gas issuer. FINRA noted that a review of financial documents would have demonstrated that the company was on troubled grounds financially and had accrued substantial liabilities. CFD and Bahrenburg were even apprised to an independent auditor’s notations that the company experienced ongoing operating losses and that looming lawsuits placed the company at significant risk of going under. Bahrenburg neither further investigated the company’s financial abilities nor ascertained whether the company would be contributing up to $6,650,000.00 of its own assets in an offering as Payson promised to investors.
The AWC stated that Bahrenburg and CFD also failed to review the circumstances of a lawsuit in which an investor had been awarded $9,000,000.00 in damages after a jury found that Payson engaged in misrepresentations regarding its experience and ability to manage the costs of drilling an oil well. CFD and Bahrenburg instead claimed to stockbrokers that it knew about the lawsuit and was still comfortable with the sale of the offering. FINRA also noted that Bahrenburg failed to review prior offerings and had failed to independently review costs and representations made by Payson concerning its drilling project.
The securities broker dealer and Bahrenburg additionally neglected to undertake continued due diligence even though CFD’s own procedures called for this review. The regulator also noted that Bahrenburg did not document any analysis or due diligence by him relating to the Payson offerings. FINRA determined that Bahrenburg and CFD’s failure to supervise was violative of FINRA Rules 3110 and NASD Rule 3010.
The AWC also stated that CFD did not possess an adequate basis to believe that Payson offerings were appropriate for investors. From March of 2015 and February 2016, $2,200,000.00 in Payson offerings were recommended and sold to 31 investors. Customers potentially sustained catastrophic losses when Payson filed for bankruptcy protection in 2016. FINRA stated that CFD did not take into account the red flags relating to the company’s lawsuits and financial status. Its failure to conduct due diligence rendered investment recommendations unsuitable for investors. FINRA stated that CFD violated FINRA Rule 2111 in this respect.