Spencer Edwards Inc. a brokerage firm headquartered in Centennial Colorado has been censured and fined $495,000.00 and suspended from conducting securities business for forty-five days by Financial Industry Regulatory Authority (FINRA) according to an Extended Hearing Panel Decision containing findings that (1) the firm made unsuitable investment recommendations to customers concerning private placement investments (2) the firm had communicated with prospective customers regarding notes in a manner which was unbalanced and misleading and (3) the firm failed to supervise the due diligence process pertaining to the notes offered to customers. Department of Enforcement v. Spencer Edwards Inc. Disciplinary Proceeding No. 2014041862701 (Nov. 14, 2018).
According to the Decision, Spencer Edwards conducted an offering of notes issued by Digi – a company whose business concept was to install billboards and lease signage space. The firm was apparently in need of significant capital to fund operations. Therefore, it sought to initially raise $1,000,000.00 through its issuance of convertible promissory notes and later finance another $10,000,000.00 so that the company could be fully functional.
Digi reportedly promised lofty returns on the notes – as much as twenty five percent annually – conditioned on its ability to lease signage space. Apparently, the accumulated interest and unpaid principal on the Digi notes was due twenty-four months after the notes were issued to investors absent the notes being converted to equity. However, the Decision reported that Digi failed to pay the notes, and the thirteen customers who purchased Digi notes had been harmed as a result.
FINRA’s Extended Hearing Panel found that Spencer Edwards failed to inspect Digi before conducting the offering. Particularly, the Decision stated that the firm’s due diligence records had been in complete disarray. Evidently, the due diligence regarding Digi notes had not been supervised or reasonably performed. Not only that, but the firm’s unbalanced and misleading sales materials had been evidently used for an extended period.
Further, the Extended Hearing Panel found that the firm did not comprehend the duties it had to its customers. For example, the firm hired Joe Lavigne to run their investment banking department; however, Lavigne had no experience with investment banking and never engaged in any due diligence for offerings. Plus, Lavigne’s due diligence was not supervised.
Lavigne was reportedly provided no guidance or oversight from the firm to enable him to do his job. As a result, Lavigne reportedly failed to evidence that any due diligence into Digi was conducted, and had not acted upon obvious concerns in regard to the incomplete and inconsistent documentation and information provided by Digi in reference to the securities offering. Moreover, the firm reportedly disregarded that the incomplete, inaccurate and inconsistent information regarding the offering had been embedded within marketing materials. The Decision stated that the firm simply permitted this inaccurate, unbalanced and misleading sales literature to be used.
The Extended Hearing Panel further stated that the firm abused the confidence and trust placed in it by its customers, and sold Digi notes despite having failed to even try to understand the nature of the offering. For example, the firm conducted no independent investigation into Digi’s ability to secure leases, which was germane to its ability to pay the attractive twenty-five percent returns. FINRA ultimately found that the firm lacked any reasonable basis to conclude that the sale of the notes were suitable for any investor, let alone the thirteen investors who purchased the notes.
Initially, FINRA lodged a six-cause Complaint against Spencer Edwards on December 4, 2017. Particularly, FINRA alleged that the firm’s unreasonable due diligence regarding Digi notes was violative of FINRA Rule 2010 and 2111(a); the firm’s distribution of incomplete and misleading Digi sales materials was violative of FINRA Rules 2010 and 2210; the firm’s supervisory failures pertaining to due diligence on Digi was violative of FINRA Rules 2010 and NASD Rule 3010(a) and 3010(b); and the firm failed to provide a customer’s $50,000.00 check to Digi; conduct violative of FINRA Rule 2010 and Securities Exchange Act of 1934 and Rule 15c2-4(a). FINRA’s Extended Hearing Panel found the firm to have committed those FINRA Rule violations.
As noted in the Decision, Spencer Edward’s disciplinary history is extensive, which suggests that the firm does not take compliance measures seriously. For example, the firm was previously censured and fined $707,000.00 by FINRA’s Extended Hearing Panel according to a Decision containing findings that the firm, and those under its control, facilitated sales of billions of non-exempt and unregistered stock; conduct violative of Securities Act of 1933 Section 5. Moreover, FINRA’s Extended Hearing Panel found the firm to have failed to supervise its business practices with a view towards preventing unlawful unregistered securities sales.
The information contained herein has been obtained from reliable sources however may not be accurate and is not guaranteed by us. Readers are encouraged to undertake their own independent investigation and evaluation of the relevant facts. All claims and allegations are subject to adjudication, decisions may be subject to appeal, and no inference is intended, nor should any inference be made from any information contained herein from any source.
This posting and the information on our website is for general information purposes only. This content should be not considered legal advice, and any responses, comments, e-mails, other communications do not form any attorney client relationship. Attorney Advertisement. See Important Disclaimer
Guiliano Law Group
Our practice is limited to the representation of investors. Over the last three decades, we have recovered more than a hundred million dollars for more than 1,000 injured investors from all over the United States and several foreign countries. We accept representation purely on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you. There is never any charge for a confidential consultation or an evaluation of your claim. For more information, contact us at (877) SEC-ATTY.
For more information concerning common claims against stockbrokers and investment professionals, please visit us at securitiesarbitrations.com
To learn more about FINRA Securities Arbitration, and the legal process, please visit us at securitiesarbitrations.com
