McDonald Partners LLC, a securities broker-dealer headquartered in Cleveland, Ohio, has been censured and fined $100,000.00 by Financial Industry Regulatory Authority (FINRA) based in part on findings that McDonald Partners failed to perform due diligence concerning private placement offerings, including failing to disclose to investors the risks relating to the offerings. Letter of Acceptance, Waiver, and Consent No. 2019060692401 (June 22, 2022).
According to the AWC, from 2013 to 2017, McDonald Partners took part in several offerings that had been plagued by issuers’ wrongdoing and mismanagement. FINRA states that private placement offerings were suspended through McDonald Partners in February of 2019 following the firm’s determination that it needed to improve supervision procedures relating to private offerings.
FINRA states that by March of 2019 – a month after that suspension — private placement sales for Company A, a cannabis company, had been approved by McDonald Partners. The AWC indicates that one of the founders of Company A was a former McDonald Partners stockbroker.
FINRA states that red flags uncovered by McDonald Partners included Company A’s inexperienced management, business prospects, and unreasonable revenue and capital-raising projections. Concerns pertaining to Company A led McDonald Partners to decline to sell its interests to customers. But that decision was reversed in short order, enabling stockbrokers to sell the private placement interests.
FINRA states that a second private placement had been introduced to McDonald Partners in April of 2019. The AWC states that the issuer of this second private placement was created to invest in Company A. Loans were made to the issuer through the founders of Company A, and the proceeds of loans were used to buy Company A convertible debt. FINRA states that McDonald Partners agreed to be the placement agent for this second private placement.
According to the AWC, McDonald Partners conducted only a limited review of information and documents relating to the issuer of the second private placement. McDonald Partners did not make sure that Company A’s convertible debt was purchased by the issuer with proceeds from the loans. The identity of the lenders of the loans was not reviewed by McDonald Partners. FINRA also states that Company A’s performance would influence the success of the second private placement offering – but concerns about Company A’s business prospects were not addressed by McDonald Partners.
FINRA notes that the private placement memorandum for the second private placement offering contained red flags that McDonald Partners did not uncover and address. The regulator states that the memorandum did not contain a requirement for investors’ funds to be placed into escrow before a contingency was met. No closing date for this contingency period had been specified in the memorandum. There was no requirement of investor funds being returned if the contingency was not obtained. The regulator also notes that the memorandum did not identify that the founders of Company A were the lenders of a loan that funded the issuer’s investments in Company A.
The second private placement offering was authorized by McDonald Partners on May 30, 2019. The regulator states that the authorization came with the condition that a representative from McDonald Partners be part of an advisory committee that influences decisions with investor proceeds. The committee was not formed, according to the regulator.
The AWC states that 25 customers were advised by McDonald Partners to collectively invest $4,250,000.00 in private placement interests. McDonald Partners was compensated by the issuer for being the sole placement agent. FINRA states that McDonald Partners violated FINRA Rules 2010 and 3110 for failing to conduct due diligence before customers were advised to invest in the offering.
This is not the first time that McDonald Partners has been censured for private placement offerings. The firm was fined $50,000.00 and censured by FINRA in February of 2018 based in part on findings of McDonald Partners failing to protect investor funds and findings of the firm providing a private placement memorandum to investors containing misstatements relating to the offering. FINRA found that McDonald Partners violated FINRA Rules 2010 and 2210 as well as Securities Exchange Act of 1934 Rules 15c2-4 and 10b-9.
McDonald Partners was also fined $150,000.00 by Securities and Exchange Commission (SEC) in August of 2021, supported by findings of McDonald Partners’ failure to disclose information to investors when the firm was a placement agent relating to two offerings. SEC found that McDonald Partners violated Securities Act of 1933 Sections 17(a)(2) and 17(a)(3).