Scott J. Freeze of Huntington Valley, Pennsylvania, a stockbroker with Street One Financial (SOF), was fined $10,000 and suspended for three-months from association with any Financial Industry Regulatory Authority (FINRA) member firm in any capacity after consenting to findings that he had improperly engaged in outside business activities. Letter of Acceptance, Waiver and Consent, No. 2013035632801 (Dec. 23, 2015).
The AWC stated that the SOF’s concentration was in the research, education, and trading of Exchange Traded Funds. Freeze reportedly acted as the SOF’s president and sole owner, where during the relevant period, SOF employed three people (which included Freeze). SOF was never registered as a broker-dealer with FINRA, the U.S. Securities and Exchange Commission, or any self-regulatory organization.
According to the AWC, from January 2011 through October 2012, Street One Financial, acting via Freeze, had improperly entered into agreements with three broker-dealers to pay compensation to SOF for the routing of customer orders for execution (referred to as PFOF Agreements). The AWC stated that Freeze did not inform or obtain the Firm’s approval to enter into the Agreements.
During the relevant period, JG was the chief executive officer, president and sole owner of the Firm. In October 2010, the Firm and SOF entered into a written agreement where Freeze and two other SOF employees became registered with the Firm, and operated from an Office of Supervisory Jurisdiction in Huntington Valley, Pennsylvania – referred to as the Huntingdon Branch. An Office of Supervisory Jurisdiction Agreement between SOF and the Firm called for the Firm to pay SOF seventy-five percent of SOF’s gross commission minus expenses.
The AWC then reported that in December 2010, Freeze had submitted an outside business activity request form to JG and the Firm which disclosed his proposed involvement with SOF. Freeze reportedly represented that SOF’s activity was limited to engaging in educational activities, public relations, and data analysis pertaining to exchange traded funds. JG, based on such information, approved Freeze’s involvement with SOF.
The AWC indicated that Freeze, on behalf of SOF, had entered into payment for order flow agreements with at least three broker-dealers, where they agreed to pay SOF for routing its institutional customer orders to them for execution. Freeze reportedly failed to disclose or receive authorization from the Firm to enter into the agreements. At least three broker-dealers subsequently made payments of $1,061,448 to SOF pursuant to the PFOF agreements. Yet, SOF was prohibited from receiving commissions due to not being a registered broker-dealer.
The AWC stated that JG was unaware of the existence of the PFOF Agreements or that Freeze and SOF had received compensation under these agreements, despite the fact that he was aware that Huntington Branch routed some of its orders to other broker-dealers for execution. The AWC noted that in order to effectuate the commission split pursuant to the OSJ Agreement, Freeze had engaged in regular discussions with JG pertaining to remuneration due to SOF for commissions earned. Yet, Freeze failed to disclose to the Firm that SOF had received payments totaling $1,061,448 from other broker-dealers pursuant to the PFOF agreements. FINRA found that Freeze’s conduct in this regard was violative of FINRA Rule 2010.
The AWC further indicated that Freeze did not disclose that he and SOF would engage in outside business activities with other broker-dealers and receive $1,061,448 in compensation. Of that, SOF and Freeze were entitled to $796,086 and the Firm was entitled to receive $265,362. The PFOF Agreements, according to FINRA, were outside the scope of Freeze’s employment with the Firm. Freeze was found to have exceeded the scope of his previously disclosed and approved outside business activity, in violation of FINRA Rules 3270 and 2010.
FINRA also found that as a result of Freeze’s failure to disclose the compensation paid to SOF pursuant to the PFOF Agreements, the Firm’s financial books were inaccurate from February 2011 – April 2012 in violation of SEC Rule 17a-3(a)(2), resulting in FINRA finding that Freeze violated NASD Rule 3110(a) and FINRA Rule 2010, and FINRA Rules 4511. Finally, FINRA found that by Freeze causing the Firm to file inaccurate FOCUS reports, Freeze had violated NASD Rule 3110(a) and FINRA Rule 2010, and FINRA Rules 4511.
FINRA Rule 3270 states that no registered person like Freeze may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his/her member firm, unless he/she is provided prior written notice to the member. Selling away, also known as private securities transactions or undisclosed outside business activities, occurs when a Stockbrokerengages or participates in the sale of securities to investors outside of the formal approval of the securities firm with whom they are associated.
As a general matter, stockbrokers are only permitted to engage in the solicitation or sale of investments and investment related products approved by their firm. However, quite frequently, stockbrokers solicit, participate, or directly engage in the sale of typically unregistered securities or investments without the approval and outside of the auspices of their firm. These investments may take on many forms, and may include the recommendation of an outside money manager, or a hedge fund, which may sometimes turn out to be a Ponzi scheme. Sometimes these outside investments may include off-shore securities, insurance trusts, stocks or ownership interests in small businesses, startup ventures, corporate debentures, mortgage notes, private placements, promissory notes, oil & gas interests, real estate partnerships, pre-IPO shares, and a variety of other investments.
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