Scottsdale Capital Advisors Corp a brokerage firm headquartered in Scottsdale Arizona as well as its director John Joseph Hurry and chief compliance officer Timothy Brian DiBlasi and president Darrel Michael Cruz have been subject of Financial Industry Regulatory Authority (FINRA) National Adjudicatory Council Decision affirming FINRA’s Extended Hearing Panel’s findings that (1) the firm effected sales of microcap securities that were neither registered nor exempt from registration (2) the firm and DiBlasi failed to supervise its microcap securities business with a view towards ensuring against unregistered sales and (3) Hurry established a foreign broker-dealer in an unethical manner to distance Scottsdale Capital Advisors from being closely involved with offshore liquidations of microcap securities. In the Matter of Department of Enforcement v. Scottsdale Capital Advisors Corporation et al. No. 2014041724601 (July 20, 2018).
According to the Decision, from December of 2013 to June of 2014, more than seventy-four million unregistered microcap securities had been liquidated by Scottsdale Capital Advisors. The Decision stated that those shares were issued by Orofino Gold Corporation, Voip-Pal.com and Neuro-Hitech, Inc. Evidently, Cayman Securities Clearing and Trading, Ltd. deposited the shares at the firm and Alpine Securities Corporation provided clearing services for the trades. Both of those entities were apparently founded and owned by Hurry.
The National Adjudicatory Council first stated that neither Securities Act of 1933 Section 4(a)(4) nor Rule 144 applied as exemptions to the unregistered sales of microcap securities. The Decision stated that Scottsdale Capital Advisors had been obligated to conduct a searching inquiry in connection with establishing an exemption, but it failed to do so. Evidently, Scottsdale Capital Advisors did not demonstrate that it satisfied aspects of Rule 144 exemptions including the relevant issuers’ non-shell company status; one-year holding periods on resales of the restricted securities; and non-affiliate status of selling customers.
The Decision then revealed that Hurry deliberately created the foreign broker-dealer to serve as a cushion between the foreign customers and Scottsdale Capital Advisors so that Hurry could evade federal securities laws. Additionally, National Adjudicatory Council stated that the firm and DiBlasi, inter alia: neglected to make sure that the written supervisory procedures utilized by Scottsdale Capital Advisors supported the operations of the firm; and failed to customize those written supervisory procedures to deal with risks pertaining to Scottsdale Capital Advisor’s depositing and liquidating of microcap securities – a major function of the firm’s business.
Further, National Adjudicatory Council stated that the firm and Cruz failed to reasonably supervise and address key business risks pertaining to liquidation of microcap securities. The Decision stated that the firm and Cruz were ineffective at ensuring that five deposits contained registration exemptions.
Scottsdale Capital Advisors was ultimately fined $1,250,000.00 for its part in the execution of the sales of microcap securities that were neither registered nor exempt from registration; conduct violative of FINRA Rule 2010. National Adjudicatory Council tacked on a $250,000.00 fine based on the firm’s supervisory failures; conduct violative of National Association of Securities Dealers (NASD) Rule 3010 and FINRA Rule 2010. Further, Cruz and DiBlasi were each fined $50,000.00 and suspended by FINRA for two years from associating with any FINRA member in any capacity based on their supervisory failures having been violative of NASD Rule 3010 and FINRA Rule 2010. Hurry was barred by FINRA in all capacities for violating FINRA Rule 2010.
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