Joseph R. Holzhause of Henderson, Nevada, a registered representative with Waddell & Reed, was barred in all capacities from associating with any Financial Industry Regulatory Authority (FINRA) member in any and all capacities after consenting to findings that he had signed and distributed to a third party a false and materially misleading letter, failed to provide his firm with disclosure of outside business activities, and failed to comply with a FINRA investigation into allegations of his misconduct. Letter of Acceptance, Waiver and Consent, No. 2014039707402 (Nov. 20, 2015).
According to the AWC, on November 26, 2013, Holzhause had signed and distributed to a third party a letter on Waddell & Reed letterhead purporting to confirm client LV’s financial ability to purchase a multi-million dollar home. FINRA found that the letter was misleading because LV was not a client of Waddell & Reed, and LV never executed any transaction through the firm and an account was never opened for LV. Additionally, the letter was misleading according to FINRA because LV had no funds or securities at the firm and Holzhause never reviewed any account statements, tax returns, or other financial documents validating LV’s claimed wealth. FINRA found that Holzhause’s conduct in this regard, which included making statements based solely on LV’s unverified oral representations, constituted a violation of FINRA Rule 2010.
The AWC then stated that while Holzhause was registered with his firm, he and another registered representative had provided consulting services to LV, which included identifying real estate, attending home viewings, coordinating communications with potential real estate business partners, and drafting the real estate transaction paperwork. The AWC reported that in December 2013, Holzhause and another registered representative incorporated an outside business, Robert Kaye Consulting, where Holzhause served as the chief executive officer and president. Robert Kaye reportedly billed LV $40,000 for the services performed by Holzhause.
The firm’s written policies, according to FINRA, required registered representatives to complete an outside business activity form and obtain written approval from the firm prior to engaging in the outside activity. Holzhause reportedly failed to provide written disclosure or obtain approval from the firm prior to engaging in the aforementioned activity. FINRA found Holzhause’s conduct to be in violation of FINRA Rules 3270 and 2010 in this regard.
According to FINRA Rule 3270, FINRA’s position is that no registered person like Holzhause 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 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.
The AWC further stated that FINRA, pursuant to Rule 8210, requested that Holzhause provide on-the-record testimony on July 21, 2015, in connection with their investigation into allegations of Holzhause’s misconduct. According to the AWC, Holzhause did provide partial testimony, but did not complete his testimony after agreeing to do so by October 5, 2015. Holzhause reportedly indicated to FINRA that he did not intend to provide testimony on the October 5, 2015 date or at any future point. Consequently, FINRA found Holzhause to be in violation of FINRA Rules 8210 and 2010, leading to his bar.
FINRA registered representatives like Holzhause who do not cooperate with FINRA’s investigations often face a permanent bar from practicing in the securities industry as such lack of cooperation violates FINRA’s Rule 8210 – requiring that no member or person shall fail to provide information or testimony or permit an inspection and copying of books, records, or accounts pursuant to the rule. FINRA typically accompanies a Rule 8210 violation with a Rule 2010 violation when individuals, according to FINRA, do not appear to observe high standards for commercial honor and just and equitable principles of trade.
Public disclosure records via FINRA’s BrokerCheck reveal that on December 20, 2013, Waddell and Reed permitted Holzhause to resign amid allegations of his aforementioned misconduct.
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