Source Capital Group, Inc., a broker-dealer headquartered in Westport, Connecticut, has been charged by Financial Industry Regulatory Authority Department of Enforcement in a Complaint alleging that the firm, inter alia, failed to disclose to investors certain material facts concerning interests in limited partnerships. Department of Enforcement v. Source Capital Group, Inc., No. 2014038889501 (Dec. 23, 2016).
According to the Complaint, representatives of Source Capital Group located in Florida, Texas, and Kentucky (referred to as the Bowling Green Complex) sold partnership interests in Bayou City Exploration, Inc. and Blue Ridge Group, Inc. FINRA alleged that Source was obligated to make disclosures to customers pertaining to all material facts regarding the partnership interests, and to avoid making misrepresentations.
However, the Complaint stated that between March 8, 2013, and January 8, 2014, prospective investors were not made aware by Source that expenses of the Bowling Green Complex were actually paid by the issuers of the securities; that HP and SL (members of Bayou City and Blue Ridge) maintained substantial management of Bowling Green Complex’s operations and personnel; and that Source’s registered representatives received non-cash compensation from Blue Ridge Group and Bayou City Exploration.
Specifically, HP was Bayou City’s senior vice president, and SL was Blue Ridge’s chief executive officer. Apparently, despite SL not having any principal authority or having been registered with Financial Industry Regulatory Authority (FINRA), SL substantially managed the operations of Bowling Green from May of 2012 to October of 2013. Source managers were allegedly provided direction from SL concerning the supervision, performance, registration, and hiring of brokers working for Source.
Additionally, during the same time frame, HP reportedly participated in the hiring and firing of brokers working for Source. HP, according to the Complaint, even decided which brokers within Source would be provided with Bayou City and Blue Ridge sales leads.
Additionally, from August of 2011 to June of 2013, the Source representatives received airfare and hotel accommodations, which accumulated to thousands of dollars. Apparently, these expenses were paid by Bayou and Blue Ridge to representatives of Source for their sales efforts in soliciting investments in Bayou and Blue Ridge.
Further, before March of 2013, Source’s private placement memorandums indicated that expenses had been paid by Bayou City and Blue Ridge for the benefit of Bowling Green Complex. Apparently, this information was omitted from private placement memoranda from March of 2013 through January of 2014.
FINRA alleged that Source’s failure to disclose the aforementioned facts to investors was conduct violative of FINRA Rule 2010, as well as Securities Act of 1933 Section 17(a)(2) and 17(a)(3).
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