James J. Nixon of Westport, Connecticut, a stockbroker with Terranova Capital Equities, was fined $15,000 and suspended for three months in all capacities from associating with any Financial Industry Regulatory Authority (FINRA) member after consenting to findings that he engaged in unauthorized private securities transactions and made misleading statements to investors. Letter of Acceptance, Waiver and Consent, No. 2013038289101 (Jan. 8, 2016). Bridge Capital Securities discharged Nixon on September 13, 2013, amid allegations that Nixon sold Blackridge Technologies, a Regulation D private placement away from his member broker-dealer.
According to the AWC, from May 2, 2013 through August 23, 2013, Nixon had sold $600,000 of BRT promissory notes to three accredited investors in five transactions. Nixon’s engagement letter with BRT reportedly provided that compensation for his sales would be directly paid to Bridge Capital, and that Nixon had referenced a potential deal with BRT in emails sent to Bridge Capital’s management in June-July 2013. Yet, the AWC indicated that Nixon actually failed to disclose such letter to Bridge Capital or provide the firm with detailed notice of the BRT transactions until August 28, 2013, after the sales had already been effected.
The AWC indicated that in August, prior to disclosing the transactions to Bridge Capital, Nixon had invoiced BRT for his services, and BRT paid Bridge Capital in accordance with the engagement letter. The firm reportedly kept its portion of the fees and remitted the rest to Nixon on August 29, 2013, where the firm subsequently terminated his securities registration shortly afterwards. FINRA found that by engaging in private securities transactions prior to providing Bridge Capital with detailed written notice of the transactions, Nixon had violated Rule 3040.
The AWC additionally indicated that the BRT promissory notes were offered without a private placement memorandum. Rather, the notes were offered via a PowerPoint presentation that Nixon had prepared in conjunction with BRT. Nixon reportedly knew from the beginning of the engagement that no private place memorandum would be provided. Yet, the AWC indicated that Nixon had sent copies of the investor presentation to an estimated forty potential investors from January 2013 – August 2013.
FINRA found that the presentation which Nixon utilized had failed to contain any cautionary language that would be specific to BRT or the promissory notes. The AWC noted that the prospects for BRT had been presented with optimistic terms and projections, yet lacked sources or support. In another case, a legend on each PowerPoint slide indicated that the offering can only be made with delivery of a private placement memorandum – despite the fact that there was no private placement memorandum. Further, the presentation and Nixon’s emails had both failed to reflect that the promissory notes were distributed via Bridge Capital, or that Nixon was even a representative of Bridge Capital. As a consequence of distributing the misleading and exaggerated investor presentations, FINRA found Nixon to have violated NASD Rules 2210(d)(1)(A) and 2210(d)(1)(B) and FINRA Rules 2210(d)(1)(A), 2210(d)(1)(B)), and 2210(d)(3) and 2010.
Selling away, also known as private securities transactions or undisclosed outside business activities, occurs when a stockbroker engages 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.
Firms and individuals, not surprisingly, are prohibited from unauthorized use of customer funds, borrowing of a customer’s securities or funds, forgery, non-disclosures or misstatements of material facts, and various deceptions and manipulations. Such conduct can also be found to violate criminal and other civil laws, and be subject to sanctions by securities regulators.
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