Paul D. Garnett of Beatrice, Nebraska, a registered representative for Edward Jones, was fined $40,000 and suspended for one year from associating with any Financial Industry Regulatory Authority (FINRA) member in any capacity after consenting to findings that he participated in unauthorized private security transactions and an outside business activity. Letter of Acceptance, Waiver and Consent, No. 2013037631501 (Dec. 11, 2015).
According to the AWC, from March through July 2013, Garnett had participated in an undisclosed private securities transaction away from Edward Jones by organizing a private placement for an entity, SFG, formed to acquire an interest in SFI, a helicopter medical evacuation business. The AWC stated that Garnett had participated in the transaction by seeking investors (including those who were customers of Edward Jones) to pool their assets with other investors to purchase an interest in SFI. Garnett also reportedly coordinated the investor group’s activities; negotiated with SFI; prepared agendas for investor meetings; and followed up with investors to ensure that they signed subscription agreements and wired their funds. The AWC further stated that Garnett had failed to provide Edward Jones with notice of the transaction(s). SFG had reportedly issued $2,500,000 in securities to eight investors – including Garnett.
The AWC additionally noted that in December 2011 through March 2012, Garnett had invested $140,000 in two other private securities transactions, where he failed to notify Edward Jones. FINRA found that Garnet had violated NASD Rule 3040 and FINRA Rule 2010 in this regard.
Finally, the AWC stated that from May – July 2013, Garnett had acted as statutory manager of SFG, conducted SFG business, executed contracts on SFG’s behalf, and presided over an initial member meeting. FINRA that by failing to disclose Edward Jones that he had participated in SFG, Garnett had violated FINRA Rules 3270 and Rule 2010. Public disclosure records reveal that Edward Jones had discharged Garnett on July 8, 2013, for the aforementioned acts.
According to FINRA Rule 3270, FINRA’s position is that no registered person like Garnett 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. 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.
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.
Guiliano Law Group
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