James Michael Johnson of Richmond, Virginia, a registered representative with Commonwealth Financial Network, was suspended in all capacities from association with any Financial Industry Regulatory Authority (FINRA) member firm for two years, and fined $50,000 after consenting to findings that he made negligent misrepresentations and omissions to firm customers in connection with securities investments, while also participating in unauthorized outside business activities. Letter of Acceptance, Waiver and Consent, No. 2012032080901 (Nov. 25, 2015).
According to the AWC, in May and June of 2010, Johnson had discussed with firm customers JU and GU, a married couple, their purchase of a ten percent interest in West Virginia Farm Properties, LLC, a company formed to develop rural land into a residential neighborhood in West Virginia. The AWC stated that Johnson had inaccurately represented to the customers that all development costs were covered, houses were ready to be built, that the customers’ funds would be used to allow the company to begin building houses, and that the infrastructure for the building of the houses was already in place. FINRA found that none of Mr. Johnson’s statements were accurate.
The AWC stated that Johnson also led the customers to believe that they should expect a $5,000,000 – $9,000,000 profit for their investment, and made further statements regarding the profitability of the company. FINRA found that Mr. Johnson had no reasonable basis to make such comments.
Further, the AWC noted that Mr. Johnson had omitted material facts such as prior customers purchasing the investment in the WVFP for substantially less than the new customers were paying; the county in which the land would be located had previously refused to approve the WVFP development project; that an associate of Mr. Johnson (and one of WVFP’s initial investors) had been indicted on Ponzi scheme charges; that WVFP carried $8,300,000 in outstanding debt; and that one of WVFP’s loans was in arrears.
The AWC indicated that the customers invested $375,000 in June 2010, and then $75,000 in November 2010. In November 2010, Mr. Johnson made additional misrepresentations concerning the manner in which the customers’ funds would be used. Mr. Johnson apparently told his customers that the funds would be needed to pay an expert WVFP had retained to secure Housing and Urban Development financing for the development. FINRA again found that such comment was inaccurate. Mr. Johnson reportedly informed the customers that they would receive repayment on a $70,000 note within a short period of time by WVFP. Mr. Johnson was found to have lacked any reasonable basis to make the comment, and WVFP in fact never repaid the customers’ note. FINRA found Mr. Johnson’s aforementioned conduct of negligent misrepresentations and omissions to be in violation of FINRA Rule 2010.
Mr. Johnson, according to the AWC, had also participated in the aforementioned transactions with the customers without providing any prior notice to Commonwealth. FINRA found that Mr. Johnson’s participation involved picking up paperwork and a check from one of the customers, delivering paperwork to WVFP’s managing member, and depositing the funds. Regarding the November investment, Mr. Johnson reportedly signed the note on behalf of WVFP, picked up paperwork from one of the customer’s offices, and delivered it to WVFP’s managing member.
The AWC additionally stated that from November 2006 – March 2012, Mr. Johnson had failed to adequately disclose three outside business activities. In reference to WVFP, Mr. Johnson had reportedly disclosed the activity and received permission to participate in it. However, Mr. Johnson indicated to his firm that he had no duties or obligations concerning the company and lacked signing authority. FINRA found that Mr. Johnson had misrepresented his involvement because he was actively involved in the WVFP business – thus exceeding the permission granted to him by his firm.
Also during the relevant period, Mr. Johnson had served as a member of RAM & G Land Co., LLC, which owned a two hundred acre farm in West Virginia. Mr. Johnson, according to the AWC, paid bills on behalf of the entity from his own personal accounts and had signing authority, yet he failed to disclose his involvement with the entity to Commonwealth. Johnson further served as a member of DRM Land Co., LLC, which owned a two hundred and forty acre farm in Virginia. This company reportedly had its principal place of business as Mr. Johnson’s office, and Mr. Johnson had served as a managing member and granted authority to an outside party to hunt on the entity’s land. The AWC indicated that Mr. Johnson had failed to disclose his involvement in DRM to Commonwealth. FINRA found that Mr. Johnson’s conduct was violative of NASD Rules 3030 and 2110, as well as FINRA Rule 3270 and 2010 in this regard.
Selling away, also known as private securities transactions or undisclosed outside business activities, occurs when a stockbroker engages or participates in the sale of securities to investors outside of the formal approval of the securities firm with whom they are associated.
According to FINRA Rule 3270, no registered person like Mr. Johnson may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his/her member firm, unless he/she is provided prior written notice to the member.
As a general matter, stockbrokers are only permitted to engage in the solicitation or sale of investments and investment related products approved by their firm. However, quite frequently, stockbrokers solicit, participate, or directly engage in the sale of typically unregistered securities or investments without the approval and outside of the auspices of their firm. These investments may take on many forms, and may include the recommendation of an outside money manager, or a hedge fund, which may sometimes turn out to be a Ponzi scheme. Sometimes these outside investments may include off-shore securities, insurance trusts, stocks or ownership interests in small businesses, startup ventures, corporate debentures, mortgage notes, private placements, promissory notes, oil & gas interests, real estate partnerships, pre-IPO shares, and a variety of other investments.
Public disclosure records via FINRA’s BrokerCheck reveal that Mr. Johnson has been subject to four disclosure incidents. On April 26, 2010, Mr. Johnson settled a customer dispute for $2,500.00 after a customer alleged that a variable life policy along with other investments purchased by the customer were unsuitable for him. On March 30, 2012, Commonwealth Financial Network permitted Johnson to resign amid allegations of unauthorized outside business activities.
On June 18, 2012, Johnson settled a customer dispute for $600,000 after complainants alleged that Johnson induced them to invest in the WVFP based on fraudulent misrepresentations and also induced the customers to enter into a private mortgage. On October 30, 2013, First Allied Securities, Inc. terminated Mr. Johnson amid allegations that he violated firm policy by placing trades in a customer account without speaking to the actual customer.
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