CSSC Brokerage Services Inc. a brokerage firm headquartered in Troy Michigan has been fined $120,000.00 and suspended by Financial Industry Regulatory Authority (FINRA) for one year from engaging in private securities offerings, and Eric S. Smith (chief executive officer and owner of CSSC) has been barred from associating with any FINRA member in any capacity according to an Extended Hearing Panel Decision containing findings that CSSC and Smith made fraudulent omissions and misrepresentations to customers of the firm. Department of Enforcement v. CSSC Brokerage Services Inc. and Eric S. Smith Disciplinary Proceeding No. 2015043646501 (Jan. 2, 2019).
According to the Decision, between 2010 and 2015, the firm incurred substantial financial setbacks. The Decision stated that in order to allay the firm’s financial problems, CSSC and Smith chose to issue convertible debenture notes so the firm could accumulate $5,000,000.00. Evidently, only $2,450,000.00 had been raised through the 2010 convertible notes offering.
Consequently, in 2014, the firm and Smith arranged for another bridge loan notes offering to raise additional monies so that the firm could address its losses on operations. The Decision stated that this 2014 offering brought in $1,100,000.00, which was insufficient. Apparently, the firm continued losing money, prompting it to issue a 2015 bridge loan note offering. However, the Decision stated that the firm and Smith committed fraud when offering potential investors the 2015 Bridge Loan Notes.
The Decision stated that Smith represented within the materials for the 2015 Bridge Loan Note Offering that 2015 would be CSSC’s most profitable year in the company’s history based on the firm finalizing consulting agreements with SDTC and the City of Jacksonville while also generating a consulting fee pertaining to Project X. Smith was apparently cognizant that prospective investors would find assurances in the representations made by Smith, and in turn, have a sense of confidence in potentially receiving the principal and interest that was promised when the notes matured.
Evidently; however, the predictions made by Smith were not substantiated and lacked an adequate factual basis. Particularly, representations were made by Smith about Project X despite Smith never verifying that a consulting agreement actually existed. The Decision stated that Smith provided prospective investors with several revisions to the offering documents for the 2015 Bridge Loans, all of which contained omissions and misrepresentations. Moreover, Smith reportedly had no basis to conclude that the firm stood to earn a $500,00.00 consulting fee for Project X.
Then, FINRA stated that Smith knew about the firm not having been in any final stages of effecting consulting agreements with SDTC and City of Jacksonville. Specifically, Smith reportedly evidenced that it was discussing the possibility of managing SDTC funds; no agreement was in place.
However, in the offering documents disseminated to prospective investors between June and November of 2015, the firm claimed that it would be an investment advisor for funds that it planned to create for SDTC, allowing fees to be earned by CSSC. Similarly, Smith evidently had no basis to believe that the firm was finalizing an agreement with Jacksonville that would enable the firm to have $1,000,000,000.00 in assets under management; no agreement had even been reviewed by Smith.
Further, the Decision stated that disclosures were not made by Smith in regards to the firm’s inability to repay $655,000.00 to investors of prior bridge loan and bond offerings. Particularly, Smith was cognizant that the principal had been owed to investors when those notes and bonds matured in 2015. FINRA’s Extended Hearing Panel stated that Smith was motivated to conceal the firm’s struggling financial state to prospective investors while making spurious projections about the revenues that the firm would make.
Evidently, Smith’s omission of the adverse financial impact on the company was significant to the potential investors. FINRA’s Extended Hearing Panel found that Smith and the firm breached an obligation to be forthright and not mislead the prospective investors. Ultimately, those misrepresentations and omissions induced customers Clarkson, Scotto, TL and BB to buy the securities.
FINRA’s Extended Hearing Panel concluded that the firm’s and Smith’s conduct of making willful omissions and misrepresentations to investors was violative of Securities Exchange Act of 1934 Section 10(b) and SEC Rule 10b-5. FINRA’s Extended Hearing Panel also found that the firm’s and Smith’s conduct was violative of Securities Act of 1933 Section 17(a)(2) and (3); and FINRA Rules 2020 and 2010.
Moreover, FINRA found that without being registered, Smith engaged in securities business on the firm’s behalf in the capacity of a representative and principal, where he supervised the firm’s brokers and solicited securities sales. FINRA’s Extended Hearing Panel found Smith’s conduct violative of FINRA Rule 2010 and NASD Rules 1031 and 1021. However, FINRA did not impose further sanctions against Smith because it barred him from the securities industry for committing fraud.
