The Financial Industry Regulatory Authority (FINRA) has expelled a Texas-based broker dealer from membership for selling $23 million in private placement offerings without having a reasonable basis to believe that the offerings were suitable for its customers.
Letter of Acceptance, Waiver and Consent
Cambridge Legacy Securities LLC consented to the expulsion as part of a Letter of Acceptance, Waiver and Consent (AWC) the firm submitted to settle a disciplinary action against it. Cambridge Legacy also consented to the entry of findings by FINRA, without admitting or denying them. FINRA accepted the AWC on June 14.
Cambridge Legacy Securities’ Questionable Sales
The sales in question occurred between August 2005 and September 2010. FINRA found that Cambridge Legacy sold interests in private placement offerings without conducting a reasonable investigation of the issuers or the securities. Therefore, the AWC said, the firm had no reasonable basis to believe the private placements were suitable for the customers to whom they were sold.
This conduct violated National Association of Securities Dealers (NASD) Rule 2310 on suitability and Rule 3010 on supervision, as well and NASD Rule 2110 and FINRA Rule 2010 on standards of commercial honor and principles of trade. NASD was a FINRA predecessor.
A FINRA member since July 2000, Cambridge Legacy is a Dallas, Texas-based firm that was a full-service general securities broker-dealer with 17 branch offices until recently. In April, the firm reported a net capital deficiency to FINRA, which prompted FINRA to issue a notice reminding the firm that it had to suspend all business operations if it was not in compliance with the net capital requirement of federal law. About a week later, Cambridge Legacy filed a Uniform Request for Broker-Dealer Withdrawal.
The Private Placements in Question
“The private placements in question were offered by Cambridge Petroleum Group (CPG), an affiliate of Cambridge Legacy. The CPG offerings sold by the firm were the CPG 2005A and B, CPG 2006A, and CPG Opportunity I and II”, the AWC said. All together, the firm sold $22 million in interests in these CPG offerings to its customers.
“From January 2008 through September 2010, the firm also sold interests in the Cambridge Legacy Group (CLG) offering, another of its affiliates. Sales of these interests totaled about $900,000”, the AWC said.
“Cambridge Legacy sold these interests in the CPG and CLG private placements without conducting a reasonable investigation”, the AWC said. “The firm failed to create files and conduct ongoing due diligence on these offerings. Therefore, the firm did not have reasonable grounds to believe that the offerings were suitable for its customers. Both the CPG and CLG offerings were unsuccessful in the long run”.
The unregistered CPG and CLG offerings were sold pursuant to the registration exemption in federal securities law known as Regulation D. In addition to its failure to perform due diligence, between June and October of 2010, Cambridge Legacy sold interests in two CPG offerings in a manner that contravened Regulations D’s rule against general solicitation.
Specifically, details of the offerings were posted on CPG’s website, which constituted a general solicitation. This information included private placement memoranda and term sheets for the offerings. Cambridge Legacy either knew, or should have known, that making this kind of detailed information public violated Regulation D.
Cambridge Legacy Securities’ Failure to Supervise
The firm also failed in its duty to institute and maintain a supervisory system capable of ensuring compliance with securities laws and regulations. While the firm’s written supervisory procedures required it to conduct due diligence for all private placements, the firm did not conduct due diligence on the CPG and CLG offerings.
Cambridge Legacy has run afoul of FINRA before. For example, in November 2010, FINRA censured the firm and ordered it to pay $218,400 in restitution to customers for its failure to conduct adequate due diligence on another private placement offering. The firm had no reasonable grounds to believe the private placement was suitable for its customers. Moreover, the firm’s brokers continued to sell the offering despite many red flags, indicative of a failure to supervise.
State of Texas Reprimanded & Fined Cambridge Legacy
Earlier in 2010, the State of Texas reprimanded the firm and fined it $50,000 for its failure to supervise one of its brokers, and the State of Georgia dismissed a regulatory action in exchange for the firm paying $30,000 in restitution to Georgia residents to whom Cambridge Legacy had made unsuitable sales.
For a complete history of FINRA disciplinary actions, regulatory actions and customers disputes, see FINRA public disclosure records.
Guiliano Law Group
If you have been the victim of securities fraud you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.