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FINRA Buries the Lede With FAS Rep Settlement
June 26, 2017In newspaper lingo, "bury the lede" refers the practice of reporting the news by not opening with the most critical aspects of the story. Although such a technique may build the tension in the telling of the tale, it's a disfavored approach. The result of a buried lede is often the sense that someone is "spinning" a story by deferring or downplaying the importance of events that may not necessarily advance the desired goal of the reporter or news organization. We've all rolled our eyes when a politician or spokesperson insults our intelligence by responding to an important question with a purported answer that meanders through nonsensical preliminaries and never quite gets to anything that remotely sounds like a "yes" or "no." For lawyers, we encounter buried ledes when reading court orders, decisions, or opinions and can't quite find the part where the "guilty" or "not guilty" is stated. Not be left out of the buried-lede festivities, FINRA recently published a regulatory settlement in which the regulator sort of digs some holes and tosses in some bodies and hopes that we don't quite notice the lumps on the landscape.
Case In Point
The AWC asserts that Piccarreto was first registered in 2013 with FINRA member firm First American Securities, Inc. The AWC asserts that "Piccarreto has no relevant disciplinary history."
SIDE BAR: Read about the variations in FINRA AWCs pertaining to the presentation of a respondent's background: "FINRA's Foolish Inconsistency" (BrokeAndBroker.com Blog,June 9, 2017).
LG, CP, and The Footnote
The AWC asserts that during his registration with First American Securities, Piccarreto worked for a company referred to in the AWC as "LG" and characterized as being co-owned by an individual referenced only as "CP." The AWC alleges that Piccarreto's primary responsibility at LG was to provide "service work" for CP. The AWC defines said service work as "assisting CP with servicing CP's clients."
SIDE BAR: For reasons that wholly escape me, FINRA thought it appropriate to bury in a footnote this disclosure:
CP was 50% owner of the holding company of FAS.I mean, seriously? FINRA really thinks that such a relevant attribution about CP's role at FAS is best buried in a footnote? Bad enough we're playing hide-and-seek with "LG."
PREOF
The AWC asserts that in late 2013, Piccarreto and CP began attending meetings with "potential customers." At these meetings, Piccarreto and CP purportedly discussed investing in what is referred to as the "PREOF Offering," which the AWC alleges was an "unregistered, private offering." Through 2014 and into the beginning of 2015, Piccarreto and CP allegedly attended some 40 meetings with potential investors, which apparently yielded about 20 actual investors in the PREOF Offering. The AWC asserts that some of the 20 investors were "elderly customers."
Each of the investors allegedly put up between $20,000 and $75,000; and Piccarreto purportedly handled the paperwork necessary to execute the investments - which included arranging for fund transfers and serving as the "primary point of contact." The AWC alleges that Piccarreto was compensated by LG in the form of a $500 per week salary. The AWC asserts that during the relevant times:
FAS had procedures in place that required associated persons to provide prior written notification of any private securities transaction to the compliance department of the Firm, and also required prior written approval by the Firm. Similarly, at all relevant times, NASD Rule 3040(a) prohibited persons associated with a member from participating in any manner in a private securities transaction except in accordance with Rule 3040. Among other requirements, Rule 3040(b) required associated person to provide written notice to the member describing the transaction in detail, the person's role in the transaction and whether he has or may receive selling compensation in connection with the transaction. Contrary to the Firm's requirements and NASD Rule 3040, Piccarreto did not provide any notification to the Firm, written or otherwise, regarding his participation in the PREOF Offering.
FINRA deemed Piccarreto's conduct in connection with the PREOF transaction to constitute a Private Securities Transaction ("PST") in violation for NASD Rule 3040 and FINRA Rule 2010.
OTRs
In connection with what the AWC's characterizes as a "FINRA investigation of FAS and other persons and entities that are related to the PREOF Offering," on August 28, 2015, FINRA conducted an on-the-record under-oath interview ("OTR") of Piccarreto, who is described as having:
FINRA deemed Piccarreto's OTR conduct to constitute providing misleading statements to FINRA in violation of FINRA Rules 8210 and 2010.Claimed to have limited knowledge about these facts, people and entities and failed to disclose his participation in the PREOF Offering. After discovering Piccarreto's participation in the PREOF Offering, on November 7, 2016, FINRA took Piccarreto's OTR again. During the November 2016 OTR, Piccarreto testified that he (1) met with approximately 40 potential PREOF investors in 2014 and early 2015, (2) coordinated all of the paperwork and fund transfers for the 20 PREOF investors and (3) remained the primary point of contact for these 20 customers. Piocarreto failed to disclose these facts to FINRA during the August 2015 OTR, even though FlNRA asked questions that should have elicited this information.
Sanctions
In accordance with the terms of the AWC, FINRA imposed upon Piccarreto a deferred $15,000 fine; a 24-month suspension from associating with any FINRA member firm in any capacity; and a requirement to requalify as a registered representative by passing the requisite examination prior to acting in said capacity or registering with any FINRA member firm following the conclusion of the suspension.
Bill Singer's Comment
Commonsense would seem to suggest that if your "boss" is involved in a private placement that your firm (which he owns a chunk of) knows what's going on. No . . . that's not always correct. Further, whether the boss is or isn't in on a deal, FINRA's PST Rule requires prior written disclosure and approval. Given the AWC's glancing references to CP and LG, it is all the more important that when such conflicts arise for FINRA to address such relationships, even if only perfunctorily. To bury the identity of "CP" and "LG" behind initials and a footnote is not appropriate in such circumstances. Pointedly, LG does not appear to be a FINRA member firm, does not appear to be subject to FINRA jurisdiction, and has not been charged with any wrongdoing as reported in the AWC. If FINRA truly wanted to respect LG's role, it would have been better to simply reference it as a "third party" and not use the initials.
I'm not necessarily disagreeing with the outcome of the Piccarreto AWC but I am unhappy with FINRA's omission of sufficient content and context. What doesn't quite get answered in the regulator's version of events is whether Piccarreto had some understanding or expectation that FAS's 50% owner "CP" had handled the necessary in-house PST compliance disclosure of the LG deal. Talk about burying the lede! What's the name of LG? What's the name of CP? Was no one at FAS aware that Piccarreto was working with CP (a 50% owner of FAS) on LG deals? Of course, Piccarreto did himself no favors by jerking around FINRA during the first OTR. Like I said, this respondent has not engendered any sympathy from this writer.
Breaking the LG Code
According to online FINRA BrokerCheck records for Piccarreto as of June 26, 2017, under the heading "Employment History," is the disclosure that from March 2012 to October 2015, he was employed by "LUCIAN GLOBAL," which would appear to break FINRA's ultra-secret code of "LG." According to the Lucian Global website:
At Lucian Global we help accredited individuals and businesses continue to protect and enhance their net worths through guidance from our qualified staff of tax, legal, and financial professionals.
Breaking the CP Code
FINRA BrokerCheck records for First American Securities, Inc. disclose under the heading of "Indirect Owners," a Christopher A. Parris, who is listed as owning "50% but less than 75%." Christopher A. Parris may (or may not) be the "CP" referenced in the AWC.
According to FINRA and SEC records, Parris was barred from association with any FINRA member and appealed that sanction to the Securities and Exchange Commission ("SEC"). In the Matter of the Application of Christopher A. Parris For Review of Action Taken by FINRA (SEC Opinion, '34 Act. Rel. No. 78669; Admin. Proc. File No. 3-17128 / August 24, 2016). The SEC Order asserts that "This matter arises out of FINRA's investigation of First American Securities ("FAS"), a FINRA member firm. Parris is a 50% owner of FAS's parent entity."As set forth in the introduction to the SEC Order [Ed: Footnotes omitted]:
Christopher A. Parris ("Parris") appeals from a FINRA order barring him from association with any FINRA member. FINRA suspended Parris for failing to produce all documents responsive to requests for information and informed Parris that he would be barred unless he requested that his suspension be terminated within three months. Parris made a timely request that FINRA Enforcement terminate his suspension, which it denied. On the same day, FINRA barred him pursuant to Rule 9552(]h), which provides that a person who "fails to request termination of [a] suspension within three months of issuance of the original notice of suspension will automatically be expelled or barred" (emphasis added). In barring Parris, FINRA did not mention Parris's request to terminate his suspension, and did not explain how FINRA had applied Rule 9552(h) to bar Parris notwithstanding his request.We conclude that the "specific grounds" on which FINRA barred Parris have no basis in the record. FINRA imposed the bar based on a default, i. e., a failure to request a termination of a suspension, although Parris did make such a request. FINRA's letter barring Parris did not acknowledge Parris's request to terminate his suspension or discuss how Rule 9552 operates when such a request has been filed. We accordingly set aside the bar. Parris did not appeal his suspension, and that suspension remains in effect.
FAS Expulsion
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, First American Securities, Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of First American Securities, Inc., Respondent (AWC 2015046056405, November 7, 2016). As noted in the "Overview" section of the FAS AWC:
In 2013 and 2015, Respondent engaged in two separate private placements which were rife with supervisory and substantive violations, including (1) inadequate due diligence; (2) failure to have a reasonable basis to recommend the private placements to customers; (3) investor offering documents which contained misleading and unwarranted statements, omitted material information and made private securities transaction; 4) failure to supervise one of the offerings as a private securities transaction; ((5) failure to file offering documents for one of the accredited investor requirements of Section 5 of the Securities Act. Consequently, Respondent violated FiNRA Rules 3110. 2111. 2210(d)(1), and 5123, NASD Rules 3010 and 3040, and acted in contravention of Section 17(a)(2) of the Securities Act of 1933 ("Securities Act") thereby violating FINRA Rule 2010. In addition to the above, the Firm engaged in securities business while being net capital deficient and filed inaccurate FOCUS reports. Therefore, the Firm violated Sections 17(a) and 15(c) of the Securities Exchange Act of 1934 and SEC Rule 17a-3(a)(2). SEC Rule 17a-3(a)(11), SEC Rule 17a-5, and SEC Rules 15c3-1(a)(2)(iv). The above also constitute violations of FINRA Rule 2010.
Online FINRA BrokerCheck records for member firm First American Securities, Inc. disclose as of June 26, 2017, the firm was expelled from the securities industry in March 2017. The expulsion appears to have been based upon the firm's failure to pay fines and or costs of $361,311 imposed pursuant to the November 2016 AWC.