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Caveat Emptor Proves True In Purchase Of Troubled Broker Dealer
October 11, 2016
Today's BrokeAndBroker.com Blog presents a story, which appears to have an ending in terms of a FINRA arbitration -- or maybe the ending was the expulsion and barring of certain key players. As puzzling as it is to figure out just where the matter terminates, the further in the past we look, the more difficult it becomes to discern just where this tale begins. The more we focus, the more detail emerges. In the end, we are still hunting for the beginning and wondering what the folks under scrutiny were thinking (or not).
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2015, associated person Claimant Murray, who represented himself pro se, asserted that:
[R]espondents made defamatory statements against him after Respondents bought Forsyth Securities ("Forsyth") from Claimant. Claimant alleged that these statements injured his reputation with former employees and with regulators.
Claimant sought $23,000.00 in compensatory damages, $1 in punitive damages, $425 in costs. In the Matter of the FINRA Arbitration Between Hugh Vincent Murray, Claimant / Counter-Respondent, vs. Steven Ellsworth Larson and Michael Thomas Standley. Respondents / Counter-Claimants (FINRA Arbitration 15-03390, September 30, 2016).
Counterclaim
Respondent Larson and Respondent Standley, who represented themselves pro se, generally denied the allegations, asserted various affirmative defenses, and filed a Counterclaim asserting misrepresentations, omissions, and breach of contract. The Counterclaim alleged that:
Claimant failed to disclose that Forsyth was in a pending action with the State of Missouri and that Claimant prematurely sent a letter to FINRA stating that Forsyth was shutting down. Respondents alleged that these actions caused them to pay significant fines to the State of Missouri and pay unneeded licensing fees. Respondents also alleged that Claimant signed a new rent agreement and gave raises to employees of Forsyth in breach of his contract with Respondents.
At the FINRA Arbitration hearing, Counter-Claimants/ Respondents sought $74,187.78 in compensatory damages and $1,030.00 in costs.
Claimant Murray generally denied the allegations and asserted various defenses.
A Moving Experience
In March 2016, Claimant Murray filed a Request for a Ruling on the Relevance of Section 12 in the Contract Between Parties to this Arbitration Case, which Respondents opposed. . In May 2016, the Arbitrator denied the request.
In May 2016, Claimant filed a Motion to Dismiss Respondents' Counterclaim, which Respondents Larson and Standley opposed. In June 2016, the Arbitrator denied the motion.
In August 2016 Respondent Larson filed a Motion to Dismiss, which the Arbitrator deferred ruling on until the evidentiary hearing, at which time Respondent Larson withdrew the motion. Thereafter, after Claimant's case-in-chief, Respondents Larson and Standley moved to dismiss Claimant's claims, which the Arbitrator denied.
In September 2016, Claimant filed a Post-Hearing Motion to Allow Claimant to See and Comment On Documents Produced by Respondents in Support of Damage Claims, which Respondents opposed. In September 2016, the Arbitrator denied the motion.
Award
The sole FINRA Arbitrator found Respondents Larson and Standley jointly and severally liable and ordered them to pay to Claimant Murray $5,600.00 in compensatory damages.
Also, the Arbitrator found Counter-Respondent/Claimant Murray liable and ordered him to pay to Resondents Larson and Strandley $6.041.00 in compensatory damages.
Pursuant to off-setting the awards, Claimant Murray has a net liability and is ordered to pay to Respondents $441.00
Bill Singer's First Comment
At this point in today's blog, we're doing a story about an arbitration, which started off when Claimant Murray alleged that Respondents Larson and Standley had defamed him. The cited defamation purportedly arose after the Respondents had purchased the Forsyth Securities brokerage firm from Claimant. In calculating the monetary damages caused to him by Respondents' alleged defamation, Claimant took into consideration how his reputation with his former employees and with regulators was harmed. We never quite learn much, if anything, about Claimant Murray, and, as such, we don't know how to gauge the alleged defamation damage. In fairly simple terms: is he a good guy, is he a bad guy, did his professional reputation take a devastating hit? We just don't have much content or context in the FINRA Arbitration Decision to form any meaningful opinions.
In their Counterclaim, Respondents asserted that Claimant was aware that the State of Missouri had a pending regulatory action against Forsyth but apparently did disclose that fact during the negotiations attendant to his sale of the business to Respondents. Not stated in the Arbitraiton Decision was whether Respondents had asked Claimant to disclose any known pending regulatory investigations and/or civil lawsuits. Not stated in the Decision is whether the Respondents should have known of such events or were on notice to make further inquiry.
Further, the Respondents alleged that Claimant prematurely notified FINRA that the brokerage firm was going out of business. Respondents asserted that Claimant had entered into a new rent agreement and gave raises to the brokerage firm's employees in breach of some contract. Finally, Respondents alleged that they had incurred fines and fees as a result of Claimant's non-disclosures and conduct.
The few paragraphs immediately above are merely my brief re-telling of what we already knew from the FINRA Arbitration Decision, which, sadly, fails to answer virtually any of the likely questions that you have. What constituted the allegedly defamatory statements? What were the terms of the purportedly breached contract by which the broker-dealer was sold? What was the nature and extent of the alleged pending regulatory action against Forsyth? Did the buyers of Forsyth require that the seller affirm in writing or confirm by his signature on some agreement/contract that there were no pending regulatory matters? What due diligence did the buyers perform when vetting their proposed purchase of Forsyth?
With a net $441 award in favor or Respondents, this FINRA arbitration doesn't even end with a whimper. The going-rate for whimpers these days is at least $500.
Unfortunately for me, the allegations in this case piqued my interest. $441 may not amount to a whimper but it is more than enough to purchase my piqued interest. Hey, I never said that I was an expensive date. Let's consider some of the findings from my online attempt at due diligence:
2011 FINRA OHO
On June 21, 2011, FINRA's Department of Enforcement filed a Complaint charging Murray with failing to supervise Joseph Dale Frost Sr. ("Frost") and John Charles Reilly Jr. ("Reilly") with respect to the filing of amendments to their Forms U4, and Russell Philip Macke ("Macke") with respect to allegedly excessive trading in two discretionary accounts. Murray, represented himself pro se. As asserted in the Complaint, Murray entered the securities industry in 1976, was employed at Forsyth from 1985 until December 2011; and served as that firm's President and Compliance Officer starting in 2004.
In FINRA Department of Enforcement, Complainant, v. Hugh Vincent Murray III, Respondent (FINRA Office of Hearing Officers Decision, 2008016437801, October 25, 2012), a FINRA Office of Hearing Officers ("OHO") Panel suspended Murray in all supervisory capacities for 90 days and ordered him to requalify by examination as a principal before serving in any supervisory capacity for failing to supervise the filing of Forms U4 by two registered representatives, in violation of NASD Rules 3010 and 2110, and FINRA Rule 2010. The Hearing Panel found that Respondent did not fail to supervise the allegedly excessive trading by a registered representative.
Bill Singer's FINRA Enforcement Comment
Oh . . . so potential buyers of Forsyth would have been able to read about the existence of a June 2011 FINRA regulatory Complaint against Murray as early as the October 2012 publication of the OHO Decision. Similarly, if the Respondents had pointedly asked Murray to disclose whether he or Forsyth had any pending regulatory investigations or were aware of the filing of any regulatory complaints, a "YES" answer would have been appropriate from Murray by June 21, 2011, at the latest. Of course, that's assuming that the buyers asked those questions.
2012 FINRA NAC
On October 25, 2012, Murray appealed the OHO Decision only to the extent of the imposition of some $3,600 in costs of the proceedings. FINRA's National Adjudicatory Council. In FINRA Department of Enforcement, Complainant, v. Hugh Vincent Murray III, Respondent (FINRA National Adjudicatory Council Decision, 2008016437801, December 17, 2013), the NAC affirmed the OHO's findings, sanctions, and costs.
2011 State of Missouri Consent Order / Forsyth Securities
Without admitting nor denying the allegations made by the Enforcement Section of the Missouri Securities Division,Respondent Forsyth Securities, Inc. entered into a settlement, which the State accepted. In the Matter of Forsyth Securities, Inc. (Consent Order, State of Missouri, AP-11-28, December 22, 2011), the following is stated:
SUMMARY OF ENFORCEMENT SECTION'S ALLEGATIONS1. The Enforcement Section of the Missouri Securities Division ("EnforcementSection") alleges that Respondent Forsyth Securities, Inc. ("Forsyth"), under thedirection of its majority owner, president, and chief supervisory officer Hugh VincentMurray, III ("Murray"), failed to reasonably supervise certain Missouri registeredagents who engaged in certain dishonest and unethical practices in violation ofMissouri law, and that this constitutes grounds to revoke, suspend, condition, limit, orimpose a civil penalty on Forsyth in Missouri pursuant to Sections 409.4412 (b), (c),and (d)(9), RSMo. (Cum. Supp. 2009).2. Forsyth and the Enforcement Section desire to settle the allegations and the mattersraised by the Enforcement Section relating to the alleged violations by Forsyth whileMurray was Forsyth's majority owner, president and chief supervisory officer.Forsyth's current owners and management were not at Forsyth when the failure tosupervise alleged in this Consent Order occurred.
In accoredance with the Consent Order, Respondent Forsyth was, in pertinent part, Censured, ordered to enhance and review its compliance and supervisory procedures,The Consent Order further asserts: and ordered to pay $3,000 in costs of which $2,000 will be suspended if the firm is in compliance with the Consent Order and Missouri Securities Act.
18. In December 2011, Murray entered into a Stock Purchase Agreement with the current owners of Forsyth. Pursuant to the terms of the Stock Purchase Agreement, Murray currently owns no interest in Forsyth. Further, Murray has resigned his positions as president and chief supervisory officer at Forsyth, and has no current position or role within the company.19. Forsyth, under its new ownership, is enhancing its compliance and supervisory procedures, as well as its ability to implement those procedures. These enhancements include, but are not limited to, the following:
a. One of the current owners of Forsyth has assumed the role of chief compliance officer at Forsyth. This individual has been registered through the CRD since at least 1999, and has experience in the operation, regulation, examination and supervision of registered agents and branch offices;b. Forsyth, under its new ownership and management, is revising its supervisory and compliance manuals with regard to suitability and transactional review;c. Forsyth, under its new ownership and management, is revising its supervisory and compliance manuals with regard to its hiring procedures;d. Forsyth, under its new ownership and management, is revising its supervisory and compliance manuals with regard to its associated persons making the necessary and timely disclosures to the CRD system; ande. Forsyth, under its new ownership and management, is undertaking a review of other portions of its existing supervisory and compliance manuals
Bill Singer's Missouri Consent Order Comment
Oh . . . so potential buyers of Forsyth would have been able to read about the existence of a Missouri Consent Order against Forsyth by January 2012. Similarly, if the Respondents had pointedly asked Murray to disclose whether he or Forsyth had any pending regulatory investigations or were aware of the filing of any regulatory orders, a "YES" answer would have been appropriate from Murray by December 22, 2011, at the latest. Of course, that's assuming that the buyers asked those questions.
2011 State of Missouri Consent Order / Murray
Without admitting nor denying the allegations made by the Enforcement Section of the Missouri Securities Division, Respondent Forsyth Securities, Inc. entered into a settlement, which the State accepted. In the Matter of Hugh Vincent Murray, III. (Consent Order, State of Missouri, AP-11-32, December 22, 2011), the following is stated:
SUMMARY OF ENFORCEMENT SECTION'S ALLEGATIONS1. The Enforcement Section of the Missouri Securities Division ("EnforcementSection") alleges that Respondent Hugh Vincent Murray, III ("Murray) the majorityowner, president, and chief supervisory officer of Forsyth Securities, Inc. ("Forsyth"),failed to reasonably supervise Missouri registered agents who engaged in dishonestand unethical practices in violation of Missouri law, and that this constitutes groundsto censure, impose a bar, or impose a civil penalty on Murray in Missouri pursuant toSections 409.4412(c) and (d)(9), RSMo. (Cum. Supp. 2009).
In accordance with the Consent Order, Respondent Murray was, in pertinent part, Permanently Barred from registering as an agent or investment adviser representative in Missouri.
Another Bill Singer Missouri Consent Order Comment
Oh . . . so potential buyers of Forsyth would have been able to read about the existence of a Missouri Consent Order against Murray by January 2012. Similarly, if the Respondents had pointedly asked Murray to disclose whether he or Forsyth had any pending regulatory investigations or were aware of the filing of any regulatory orders, a "YES" answer would have been appropriate from Murray by December 22, 2011, at the latest. Of course, that's assuming that the buyers asked those questions.
2016 State of Missouri Order to Cease and Desist
In the Matter of Oakbridge Financial Services, Inc., Private Label Money Management, Inc., Steven Larson, Michael Standley, and Kathryn Winter (Order to Cease and Desist and Order to Show Cause, State of Missouri, AP-16-11, May 12, 2016), we find, in pertinent part, the following assertions about some of the Respondents:
1. Oakbridge Financial Services, Inc. ("Oakbridge"), formerly known as Forsyth Securities, Inc. ("Forsyth") is a Missouri-registered broker-dealer . . .. . .3. Steve Larson ("Larson"), CRD number 2422755, has been registered as a broker-dealer agent with Oakbridge in Minnesota since October 4, 2011. Larson became a Missouri registered broker-dealer agent with Oakbridge on February 20, 2012 . . . Larson served as President, Chief Executive Officer ("CEO"), and CCO of Oakbridge from late 2011 until approximately October, 2015. Larson, by position and his own admission, was a control person at both Oakbridge and PLMM throughout their existence.4. Michael Standley ("Standley"), CRD number 2422939, has been a Missouri-registered broker-dealer agent with Oakbridge since August 30, 2011. . . Standley, by position, his own admission, and practice, was a control person at both Oakbridge and PLMM throughout their existence. . .
The Order To Cease and Desist asserts, in pertinent part:
C. Change of Ownership at Oakbridge and Ownership Structure at PLMM17. In or around the middle of 2011, Murray was the majority owner, president, and chief supervisory officer of Forsyth/Oakbridge.18. In or around the middle of 2011, Standley and Larson left their then-current firm, Gardner Financial Services, Inc., CRD number 2100, and Gardner Advisors, Inc., CRD number 112399, to begin working for Oakbridge with the expectation that Standley and Larson, among others, would buy Oakbridge from the current owner, Murray.19. On or about May 15, 2011, Standley, Larson, Winter, and another broker named Donald Boyce ("Boyce") entered into a letter of intent with Murray to purchase Forsyth. Collectively these brokers referred to themselves as the "Forsyth Control Group." The letter indicates that the Forsyth Control Group would pay Murray $20,000 upfront, and $1,000 per month for a period of ten years, as well as 1% of the gross profits per year up to $70,000 a year for 5 years. Each of the members of the Forsyth Control Group would receive a 17% share in the broker-dealer. The remaining shares remained with Murray for his distribution.20. Sometime thereafter, Boyce dropped out of the Forsyth Control Group.21. Significantly, based on a July 25, 2011 AWC with Winter, the Financial Industry Regulatory Agency ("FINRA") suspended Winter for six months starting on September 19, 2011, for participating in private securities transactions without providing prior written notice to Winter's member firm describing, in detail, the proposed transactions and Winter's proposed role, and stating whether Winter has received or might receive selling compensation in connection with the transactions. Winter solicited investments from three customers of her firm on behalf of a third entity, and these customers subsequently invested $750,000 in the entity, which pooled money from investors in a common enterprise with the expectation of profit derived from the efforts of others. Winter failed to disclose these private securities transactions to her firm. Winter recommended that these three customers of her firm invest in the entity without having reasonable grounds for believing that the recommendations were suitable. The petition alleges the investment was fraudulent and resulted in significant losses for these three clients.22. In fact, on September 15, 2011, Winter contributed $30,000 to the purchase of Oakbridge. She did this in advance of the imposition of her FINRA suspension and, at the time of the investment, or at the latest November 18, 2011, there was an express agreement that this represented an investment in Oakbridge for which Winter could exercise a vested right to receive a 1/3 ownership interest in Oakbridge that would become official at the exercise of her option, which she intended to exercise sometime after the expiration of her FINRA suspension.23. Separately, on September 12, 2011, Winter invested $11,000 in PLMM in exchange for a 1/3 ownership interest in PLMM.24. On or about December 15, 2011, Larson and Standley entered into a "Stock Purchase Agreement" with Murray, on behalf of Forsyth ("Oakbridge SPA"). The Oakbridge SPA included, among other things, that Larson and Standley would acquire all issued and outstanding shares of common stock and preferred stock of Oakbridge for a designated purchased price, which was a minimum of $120,000 (broken out over ten years of $1,000 monthly payments). As a result of this agreement, Standley and Larson purportedly each became 50% owners of Oakbridge.25. As a result of the November 18, 2011 agreement, further codified later in October 2013, Winter was a de facto 1/3 owner of Oakbridge from its inception in December of 2011. This was true despite a September 16, 2011 agreement between Winter and the Forsyth Control Group wherein she purported to transfer her shares to Standley and Larson.26. On or about December 22, 2011, Oakbridge (then Forsyth) entered into a Consent Order with the Missouri Securities Division for activities occurring while Murray was the owner. These activities included, among other things, failing to reasonably supervise agents, failing to have reasonable policies and procedures, and failing to have a system for implementing policies and procedures. Oakbridge was censured and ordered to review and enhance its compliance and supervisory procedures. The December 22, 2011 Consent Order resulted in Murray's permanent bar from the securities industry. The Consent Order alleged, among other things, that Murray failed to reasonably supervise Missouri registered agents who engaged in dishonest and unethical practices in the securities industry.27. At the time of the signing of the Oakbridge SPA, both Larson and Standley knew that Murray would at least either enter into a settlement agreement with the Missouri Securities Division or be the subject of an action initiated by the Missouri Securities Division.
An interesting nugget from the Order to Cease and Desist is this:
2016 Oakbridge Expelled From FINRA133. In late 2011, Oakbridge and Murray were under investigation by the Enforcement Section due to supervisory and compliance issues. At least Larson and Standley were aware that the investigation was being conducted. Murray was barred from the securities industry on or about December 22, 2011.
According to online FINRA BrokerCheck records as of October 11, 2016, On September 6, 2016, Oakbridge's FINRA membership was cancelled pursuant to FINRA Rule 9553 for "failure to pay outstanding fees." Another BrokerCheck record discloses that on August 15, 2016, Oakbridge was expelled from FINRA membership for failure to pay $20,000 in fines assessed in Oakbridge Financial Services, Inc., Respondent (FINRA Acceptance, Waiver, and Consent, 2014039174201, March 28, 2016).
Final Bill Singer Comment
Yeah, I know, this has been exhausting. On the other hand, this exercise is a valuable lesson for potential buyers of financial services firms. Submit a written demand for confirmation of the existence of pending regulatory investigations and civil/criminal proceedings. Have the seller confirm in writing the existence or non-existence of investigations, orders, complaints, settlements, and similar critical documents and undertakings. Consider creating an escrow fund into which a portion of the purchase price would be held to allow for any pending matters to resolve; and implement a process by which the escrowed funds are refunded and the deal either terminated or purchase terms altered to provide for any surprises. Retain a lawyer or other professional to conduct due diligence on potential and finalized regulatory, criminal, and civil matters BEFORE you finalize the transaction.
If you fail to follow these simple guidelines, you could find yourself in the shoes of today's buyers, who got sued by the seller, found themselves enmeshed in the ownership of a firm that would be expelled from FINRA membership and censured by one state. On top of that, the buyers are now named as respondents in a state administrative hearing.