Spencer Edwards, Inc., a brokerage firm headquartered in Centennial, Colorado, has been charged by Financial Industry Regulatory Authority (FINRA) in a Complaint alleging that the firm failed to have a reasonable basis to effect private placement sales to customers, and failed to supervise private placement activities. Department of Enforcement v. Spencer Edwards, Inc., Disc. Proceeding No. 2014041862701 (Dec. 4, 2017).
According to the Complaint, a non-public company issued convertible notes to investors through Spencer Edwards in the form a private placement that the firm conducted, in which $400,000.00 of investor funds was accumulated from September of 2013 and August of 2014.
Apparently, the firm utilized its stockbrokers to make recommendations to thirteen customers about purchasing the notes even though there was no reasonable due diligence that had been conducted supporting a conclusion that the private placements were suitable for customers. Apparently, the firm did not adequately understand the issuer’s business operations, lease status and commitments.
The Complaint revealed that the firm made the recommendations prior to which point it completed its due diligence procedure, and if the firm undertook a reasonable amount of due diligence, the firm would notice that the issuer’s representations about business operations leases was false.
Further, FINRA Department of Enforcement alleged that the firm did not uncover that the Issuer’s officers were previously sued by investors who alleged securities fraud in reference to the Issuer’s predecessor, and that the issuer’s assets were possibly affected by liens having been filed. The Complaint stated that investors would construe that information to be significant in terms of making the investment decisions.
The firm allegedly failed to ask the issuer for an executive summary associated with the issuer’s note purchase agreement even though the note purchase agreement identified it clearly within the document. Then, the firm had reportedly neglected to uncover issues raised within the issuer’s filings with the SEC as well as its filings regarding corporate status. Ultimately, FINRA Department of Enforcement alleged that the firm’s unsuitable investment recommendations were violative of FINRA Rules 2010 and 2111(a).
Moreover, the firm’s stockbrokers, SQ and JL, had disseminated information to actual and prospective customers containing misleading statements and claims as well as omissions in regard to the investments. The Complaint alleged that the materials utilized by them had not presented the information in a balanced and fair manner concerning the issuer’s lease arrangements as stated within a summary provided by the issuer to the firm.
Evidently, misleading or false statements had been made about the commitments that the issuer held in reference to digital signage locations. Plus, presentation material did not contain any reference to the risks customer would incur by making investments in the issuer, and the issuer’s notes purchase agreement purportedly omitted any mention of previous judgments, liens and securities fraud litigation. FINRA Department of Enforcement alleged that the Spencer Edward’s conduct in that regard was violative of FINRA Rules 2010 and 2210.
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