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DreamFunded Dream Faded At FINRA And SEC Declines to Stay Expulsions and Bars
November 15, 2021
There was a time, not many years ago, when crowdfunding was all the rage and the JOBS Act was supposed to democratize Wall Street. Desperate or naive entrepreneurs looking to raise modest amounts of capital were attracted by the promise that their ventures would be posted on a crowdfunding website. Except, as industry veterans knew, the investors with the real cash don't waste time on crowdfunding websites. As such, after the crowdfunding sites collected their fees, more often than not, the listings sat, barely getting nibbles, wasting away. Worse, many of the offers for funding proved to be scams and frauds. Some folks raised money and launched their business -- that's great. If the laws had been better drafted, if the sector had been better policed, then we might have realized the vision. In the end it was just another one of those things that fizzled out without much notice or fanfare. And so we move on to the next flash in the pan. NFTs anyone?
DreamFunded OHO Decision
Speaking of crowdfunding and days gone by, about two years ago, FINRA issued FINRA Department of Enforcement, Complainant, v. DreamFunded Marketplace, LLC and Manual Fernandez, Respondents (FINRA Office of Hearing Officers Extended Hearing Panel Decision / June 5, 2019)
http://www.finra.org/sites/default/files/fda_documents/2017053428201
%20DreamFunded%20Marketplace%20CRD%20283594%20and
%20Manuel%20Fernandez%20CRD%206639970%20Extended
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As set forth in the Syllabus to the 148-page OHO Decision:
A very impressive bit of drafting from OHO Hearing Officer Lucinda O. McConathy, who patiently and methodically worked her way through the fact pattern and produced an OHO Decision replete with content and context. An outstanding effort!Respondent DreamFunded Marketplace, LLC, was registered with FINRA as a funding portal member, and its co-founder and Chief Executive Officer, Respondent Manuel Fernandez, was an associated person of the funding portal member. While the entity was registered and Fernandez was associated with it, they committed multiple violations of the Securities and Exchange Commission's Regulation Crowdfunding Rules and FINRA's Funding Portal Rules, as well as FINRA Rule 8210.First Cause of Action: Respondents failed to respond fully and completely to a FINRA Rule 8210 request. They thereby violated FINRA Rule 8210, Funding Portal Rule 800(a) (which makes FINRA Rule 8210 applicable to funding portals), and Funding Portal Rule 200(a) (which requires adherence to high standards of commercial honor and just and equitable principles of trade). For this misconduct, we expel the entity Respondent from FINRA membership as a funding portal member and bar the individual Respondent from association with any FINRA funding portal member.Third Cause of Action: While acting on behalf of the entity Respondent, Fernandez made false and misleading statements regarding a purported investment in an issuer. Respondents posted the misstatements regarding the purported investment on the entity's website and on social media. In doing so, they employed a deceptive device or contrivance and created a misimpression, either with intent to mislead investors or in reckless disregard of the likelihood of misleading them. This misconduct violated FINRA Funding Portal Rule 200(b), which we conclude requires scienter, and Funding Portal Rule 200(a).As charged in the same Cause of Action, Respondents made false and misleading statements on their website regarding the due diligence that they conducted on issuers before allowing issuers to make crowdfunding offerings on Respondents' platform. They did so either with intent to mislead investors or in reckless disregard of the likelihood of misleading them. This misconduct also violated FINRA Funding Portal Rules 200(b) and 200(a).As charged in the same Cause of Action, Respondents made statements on their website about real estate transactions. These statements were misleading, and violated Funding Portal Rule 200(c)(2), which we find does not require scienter, and Funding Portal Rule 200(a).For the two scienter-based violations charged in the Third Cause of Action, together, we expel the entity Respondent from FINRA membership as a funding portal member and bar the individual Respondent from association with any FINRA funding portal member. Separately, for the non-scienter-based violation standing alone, we would find a Letter of Caution an appropriate response to a first-time violation. In light of the expulsion and bar imposed for other violations, however, we do not impose any sanction. In addition to the sanctions imposed, we order Respondents to pay hearing costs.Second, Fifth, Sixth, Seventh, Eighth, Ninth, and Tenth Causes of Action: We find that Enforcement proved some or all of the violations alleged. Because we expel the entity and bar the individual Respondent in connection with the First and Third Causes of Action, we discuss the lesser sanctions that would be appropriate for the other violations but do not impose them.Fourth Cause of Action: We dismiss the claim that Respondents lacked a reasonable basis for believing that two issuers were in compliance with their legal and regulatory obligations.Summary of the Ten Causes of Action: We summarize our determinations regarding the charges and the sanctions contained in each of the ten Causes of Action in the Introduction to the Decision, under the heading Resolution of Charges.
At first, the OHO Decision provides a somewhat flattering picture of Respondent Fernandez as a self-made-man and a rags-to-riches entrepreneur. Upon further reflection, the OHO Decision paints a more gritty and less sympathetic image [Ed: Footnotes omitted]:
Fernandez describes himself as coming from a tough, impoverished background and becoming a success through a combination of innate intelligence, hard work, discipline, and nurturing a network of mentors and connections. According to Fernandez, he did not finish high school, but he obtained a GED, took courses at Stanford University in an executive education graduate school of business program, and obtained a paralegal certificate from Lorenzo Patino School of Law in Sacramento, California. Fernandez made a point of telling us that he has a high IQ and belongs to an organization of people with high IQs. In his twenties, Fernandez became active in political affairs and the Hispanic community in Sacramento, where he grew up. At one point, he worked at Wells Fargo as a home loan consultant. After he left that position, he started a company to buy foreclosed properties from the bank, in partnership with an agency of the Sacramento government. Starting in 2008, Fernandez and a business partner began to invest in real estate through crowdfunding.Fernandez began to see access to capital as a critical problem for minorities, like himself, and he sought out wealthy and successful persons with whom he could network and from whom he could learn. Fernandez views marketing and social media as keys to success. As one of his mentors encouraged him, "You have to market yourself . . . ." Fernandez observed that another multibillionaire "wanted to be in the media a lot because that's how you attracted the best deals.Fernandez became a prolific user of social media to project an image of himself as a highly successful entrepreneur, author, and investor. As he spent time with prominent people, Fernandez promoted himself by publicizing his activities. He has posted numerous photographs of himself with well-known people on his social media accounts, including Twitter, Facebook, YouTube, and Instagram. Some of the accounts are identified as individual accounts (e.g., "mannyfernandersv") and others as corporate accounts (e.g., "dreamfunded.").Fernandez appears on television shows about investing and posts video clips from those appearances on social media. He now gives numerous speeches around the world, and portrays himself as an expert on blockchain and cryptocurrency.Fernandez believes himself a marketing genius. He described his genius as being able to get people to believe what he wants them to believe. "I know how to get the media to consistently tell a story the way I want . . . ." He claimed he had taught some of this skill to a former employee, AH. "I taught him a lot of that. How to make it indirect to make a person think it's true."An example of making a statement indirectly in order to make it more believable is the way that Fernandez is described in brochures advertising his speeches. He was scheduled to speak shortly after the second session of the hearing in Mexico at a program headlined "Show Me the Money Masterclass." The marketing brochure for that speech touted Fernandez as "a graduate of Stanford University, founder of DreamFunded and one of the investors in the CNBC show 'Make Me a Millionaire Inventor,' and on the Oprah Winfrey Network." Although he denied holding himself out as a Stanford graduate, Fernandez admitted that his public biography states that he is "Stanford educated." He blamed the misleading description of him as a Stanford graduate on someone who misread his biography when creating the brochure. We find that Fernandez purposely created a false impression by his vague description of his education that caused others to unknowingly publicize him falsely as something he is not. . . .
Pages 21 - 23 of the OHO Decision
SIDE BAR: See Fernandez's online biography as of June 10, 2019 at https://dreamfunded.com/team/manny-fernandez
If, in fact, both the JOBS Act and FINRA's Crowdfunding Portal rules were conducive to the launch and creation of a robust and reputable crowdfunding industry, then the OHO Decision would not have included this laughable description of the amazing, extensive, and awe-inspiring success of the DreamFunded Portal [Ed:footnotes omitted]:
Between July 2016 and October 2017, the DreamFunded Portal acted as an intermediary in approximately 15 crowdfunding offerings. Of those, two closed, with investors' funds released from escrow. The two offerings that closed raised an aggregate of only $15,000. During the Portal's 16 months of operations, Fernandez claims that he vetted and rejected over 800 other issuers that applied to make offerings using the DreamFunded Portal's platform. He produced no records corroborating that claim. Indeed, he testified that he tossed any paper records of his purported due diligence because they were not important.
Page 29 of the OHO Decision
Gathering Some Numbers
The FINRA Complaint was filed on February 23, 2018, with ten -- count 'em: 10 -- Causes of Action. The OHO hearings began on September 24, 2018, and concluded on November 16, 2018 -- which resulted in a total of eight days of hearings in two sessions per day. A 148-page Extended OHO Hearing Panel Decision was published in June 2019, about 18-months after the filing of the Complaint. And all this for a lousy crowdfunding portal that existed for 16 months, intermediated about 15 offerings of which only two closed for an aggregate raise of $15,000.
When you get a chance, howsabout you send me the same forensics for FINRA's investigation of Wells Fargo's unauthorized account openings, which I think impacted more than 15 customers and, I'm just guessing here, but, off the top of my head, I think the damages were a tad in excess of $15,000. Not that FINRA would ever have its priorities wrong. I'm not shedding tears over Fernandez but I sure as hell would like to see FINRA show the same zeal when going after its Large Member Firms.
On Appeal to the NAC
FINRA Department of Enforcement, Complainant, v. DreamFunded Marketplace, LLC and Manual Fernandez, Respondents (FINRA National Adjudicatory Council Decision / September 27, 2021)
https://www.finra.org/sites/default/files/fda_documents/2017053428201
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%20Manuel%20Fernandez%20CRD%206639970%20%20NAC%20Decision%20%20jlg.pdf, offers a summary of the OHO's Decision and sanctions:
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%20Manuel%20Fernandez%20CRD%206639970%20%20NAC%20Decision%20%20jlg.pdf, offers a summary of the OHO's Decision and sanctions:
This case of first impression interprets and applies the Securities and Exchange Commission's ("SEC") crowdfunding rules and FINRA's funding portal rules to a FINRA funding portal member and its associated person. Between July 2016 and November 2017, DreamFunded Marketplace, LLC ("DreamFunded Marketplace") was a FINRA funding portal member. Manuel Fernandez was DreamFunded Marketplace's founder, chief executive officer, chief financial officer, and chief compliance officer. On June 5, 2019, an Extended Hearing Panel found that DreamFunded Marketplace and Fernandez violated numerous SEC regulation crowdfunding rules and FINRA funding portal rules as they served as intermediaries for crowdfunded offerings facilitated through their online funding portal - DreamFunded.com.Specifically, the Hearing Panel found that DreamFunded Marketplace and Fernandez: (1) failed to respond fully and completely to FINRA's request for information and documents (cause one); (2) failed to deny an issuer's access to the funding portal when the issuer's offering presented the potential for fraud and raised investor protection concerns (cause two); (3) made false, exaggerated, unwarranted, promissory, and misleading statements about an investment in an issuer, the due diligence conducted on issuers, and certain real estate investments (cause three); (4) failed to conduct issuer background checks and securities enforcement regulatory histories (cause five); (5) failed to provide investors with a material change notice for an offering (cause six); (6) failed to provide investors with early closing notices for two offerings (cause seven); (7) failed to provide investors with investment cancellation notices (cause eight); (8) failed to provide investors with investment confirmation notices (cause nine); and (9) failed to implement policies and procedures reasonably designed to supervise the funding portal's activities and associated persons (cause ten). The Hearing Panel, however, found that FINRA's Department of Enforcement ("Enforcement") failed to prove that DreamFunded Marketplace and Fernandez did not have a reasonable basis for believing that certain issuers were not in compliance with the Securities Act of 1933 ("Securities Act") under cause four, and the Hearing Panel dismissed parts of Enforcement's allegations under causes two and six.For sanctions, the Hearing Panel expelled DreamFunded Marketplace from funding portal membership, and barred Fernandez from associating with any FINRA funding portal member in any capacity, for: (1) failing to respond fully and completely to FINRA's request for information and documents under cause one; and (2) making false, exaggerated, unwarranted, promissory, and misleading statements about Fernandez's investment in an issuer and the funding portal's due diligence on issuers under cause three. The Hearing Panel also assessed, but declined to impose, the following sanctions on DreamFunded Marketplace: (1) four 30-calendar day suspensions under cause two, cause five, causes six through nine as an aggregate sanction, and cause ten; (2) a letter of caution for the remaining liability under cause three; and (3) the submission and creation of a supervisory plan to address the funding portal's deficiencies under cause ten. For Fernandez, the Hearing Panel assessed, but declined to impose, the following sanctions: (1) a six-month suspension and $10,000 fine under cause two; (3) three 30-calendar day suspensions under cause five, causes six through nine as an aggregate sanction, and cause ten; (3) a letter of caution for the remaining liability under cause three; and (4) the submission and creation of a supervisory plan to address the funding portal's deficiencies under cause ten. After an independent review of the record, including all causes of action and all of the Hearing Panel's findings and sanctions,2 we modify the Hearing Panel's findings and sanctions.
at Pages 1 - 2 of the NAC Decision
As to the parameters of the issues presented on appeal to the NAC, Footnote 2 of the Decision asserts:
DreamFunded Marketplace and Fernandez appealed the Hearing Panel's decision. Enforcement filed a cross-appeal. DreamFunded Marketplace's and Fernandez's appeal focuses on the Hearing Panel's findings under cause one and cause ten and parts of the Hearing Panel's findings under cause three. Enforcement's appeal focuses on the parts of cause two that the Hearing Panel dismissed, in addition to the Hearing Panel's dismissal of the entirety of cause four. The novelty and importance of the issues presented, however, call for the de novo review of this entire case.
at Page 2 of the NAC Decision
As summarized under the "Conclusion" to the NAC Decision [Ed: footnotes omitted]:
We affirm the Hearing Panel's findings that DreamFunded Marketplace and Fernandez: (1) failed to respond fully and completely to FINRA's request for information and documents (cause one); (2) failed to deny Issuer A's access to the funding portal when Issuer A's offering raised investor protection concerns (cause two, in part); (3) made false, exaggerated, unwarranted, promissory, and misleading statements about their investment in an issuer, the due diligence that they conducted on issuers, and certain real estate investments (cause three); (4) failed to conduct issuer background checks and securities enforcement regulatory histories (cause five); (5) failed to provide investors with a material change notice for Issuer A's offering (cause six, in part); (6) failed to provide investors with early closing notices for Issuer A's and Issuer B's offering (cause seven); (7) failed to provide investors with investment cancellation notices (cause eight); (8) failed to provide investors with investment confirmation notices (cause nine); and (9) failed to implement policies and procedures reasonably designed to supervise the funding portal's activities and associated persons (cause ten).We dismiss: (1) the parts of Enforcement's allegations under cause two, concerning whether DreamFunded Marketplace and Fernandez failed to deny Issuer A's and Issuer B's access to the funding portal based on their projections and forecasts; (2) the entirety of Enforcement's allegations under cause four, concerning whether DreamFunded Marketplace and Fernandez had a reasonable basis for believing that Issuer A and Issuer B had complied with the Securities Act; and (3) the parts of Enforcement's allegations under cause six, concerning whether DreamFunded Marketplace and Fernandez failed to provide investors with two additional material change notices for Issuer A's offering.For sanctions, we impose three separate expulsions on DreamFunded Marketplace and three separate bars on Fernandez. First, we expel DreamFunded Marketplace from funding portal membership, and bar Fernandez from associating with any FINRA funding portal member in any capacity, for failing to respond fully and completely to FINRA's request for information and documents under cause one. Second, we expel DreamFunded Marketplace from funding portal membership, and bar Fernandez from associating with any FINRA funding portal member in any capacity, for making false, exaggerated, unwarranted, promissory, and misleading statements about their investment in an issuer, the due diligence that they conducted on issuers, and certain real estate investments under cause three. Third, we expel DreamFunded Marketplace from funding portal membership, and bar Fernandez from associating with any FINRA funding portal member in any capacity, as an aggregate sanction for its gatekeeper, investor protection, and supervisory failures under cause two and causes five through ten. Finally, we affirm the Hearing Panel's order that DreamFunded Marketplace and Fernandez pay hearing costs of $15,889.03, and we assess appeal costs of $1,273.48 on DreamFunded Marketplace and appeal costs of $1,273.48 on Fernandez.
at Pages 81 - 82 of the NAC Decision
If you read the 82-page NAC Decision, which I did -- and that's about an hour out of my life that I will never get back -- you will likely be struck by the somewhat intemperate tone. Given that regulatory decisions tend to be somewhat bland affairs, the disdain in this one is notable. Is it undeserved? Is it unfair? Not really, I think that Wall Street has gotten away with horrific behavior for far too long, and the regulatory community's response is often a bit too polite, the language a bit too measured. Sadly, the worse the actor and the more harmful the fraud, Hollywood seems to think it's all an invitation to makes a movie and turns the bad guys into folk heroes. Clearly, this NAC Decision made no effort to soften its blows [Ed: footnote 152 omitted]:
The misconduct, resulting in the Hearing Panel's assessment of the multitude of sanctions noted above, are not technical rule violations. Under cause two and causes five through ten, DreamFunded Marketplace and Fernandez failed to deny an issuer's access to the funding portal when the issuer's offering raised investor protection concerns, failed to provide investors with important notices, and failed to implement policies and procedures to supervise the funding portal's activities and associated persons. These violations demonstrate DreamFunded Marketplace's and Fernandez's abandonment of their gatekeeper, investor protection, and supervisory obligations for the crowdfunded offerings and transactions that they facilitated through their funding portal. And, as explained below, we expel DreamFunded Marketplace, and bar Fernandez, for these failures.
at Page 70 of the NAC Decision
The record in this case is substantial, and, after a thorough review of the entirety of it, DreamFunded Marketplace and Fernandez emerge as an entity and individual focused on gallivanting in the crowdfunding space without regard for the rules, regulations, or basic work of serving as the intermediary between issuers and investors. Basically, DreamFunded Marketplace and Fernandez took the risks inherent in crowdfunded offerings and transactions and made them riskier. "[P]roper supervision serves such an important role in protecting investors, [and] egregious violations of supervisory rules often warrant the most severe sanctions." We agree, and, for the utter abdication of their gatekeeper, investor protection, and supervisory obligations, we expel DreamFunded Marketplace and bar Fernandez.153= = = = =Footnote 153: For cause two and causes five through ten, the Hearing Panel assessed, but did not impose the following sanctions on DreamFunded Marketplace: (1) four 30-calendar day suspensions under cause two, cause five, causes six through nine as an aggregate sanction, and cause ten; and (2) the submission and creation of a supervisory plan to address the funding portal's deficiencies under cause ten. For Fernandez, the Hearing Panel assessed, but did not impose: (1) a six-month suspension and $10,000 fine under cause two; (3) three 30-calendar day suspensions under cause five, causes six through nine as an aggregate sanction, and cause ten; and (3) the submission and creation of a supervisory plan to address the funding portal's deficiencies under cause ten. The Hearing Panel declined to impose these sanctions on DreamFunded Marketplace and Fernandez because of the expulsions and bars imposed on them under causes one and three.
at Page 81 of the NAC Decision
UPDATE: October 2021 Appeal to SEC
On October 28, 2021, DreamFunded and Fernandez appealed FINRA's findings to the SEC, and moved for a stay of the expulsions of the company and bars imposed upon Fernandez.
MANUEL FERNANDEZ For Review of Disciplinary Action Taken by FINRA (SEC Order Denying Motion for a Stay, '34 Act Rel. No. 93566, Admin. Proc. File No. 3-20639 / November 12, 2021)
https://www.sec.gov/litigation/opinions/2021/34-93566.pdf
Extraordinary Remedy of Stay
As noted in the SEC Order, a stay is deemed by the federal regulator to be an "extraordinary remedy," which places the burden of demonstrating that said relief is warranted upon the Movant. In consideration of that threshold, the SEC Order enunciates the following threshold standard [Ed: footnotes omitted]:
(i) there is a strong likelihood that it will eventually succeed on the merits of the appeal; (ii) it will suffer irreparable harm without a stay; (iii) another party will suffer substantial irreparable harm as a result of a stay; and (iv) a stay is likely to serve the public interest. "The appropriateness of a stay turns on a weighing of the strengths of these four factors; not all four factors must favor a stay for a stay to be granted." "The first two factors are the most critical, but a stay decision rests on the balancing of all four factors."
at Page 3 of the SEC Order Denying Stay
Unsatisfied
Preliminarily, the SEC found that the Applicants had not satisfied the threshold standard because:
[R]ather than addressing any of the stay factors outlined above, Applicants' application for review merely "request[s] a stay of the decision until the appeal hearing decision is complete," provides biographical information about Fernandez, and asserts "some facts to consider" on appeal. Applicants do not describe how those assertions relate to any of the four stay factors, nor do Applicants explain why any of those assertions entitle them to a stay of the expulsions and bars FINRA imposed. . . .
at Page 4 of the SEC Order Denying Stay
Going to the Video
In citing Applicants' failure to raise a serious question on the merits, the SEC offers this example:
For example, Applicants assert that they provided FINRA staff with "an email with a Drop[B]ox link . . . with the full documents," but Applicants do not provide any factual support for this assertion. Applicants also seem to assert that they are not liable for the fraudulent misrepresentations concerning the issuer investment because Fernandez "was in front of the camera," "not the producer," and "can't control what they put out." However, the violation stemmed from Applicants' own sharing of the video clip via social media and DreamFunded's website. Applicants make several other assertions of factual and procedural error, but Applicants offer no support for these assertions and the record before us does not substantiate any of them. We therefore find that Applicants have not established either a likelihood of success on the merits or, at a minimum, a serious legal question going to the merits.
at Page 5 of the SEC Order Denying Stay
Having further determined that Applicants did not establish that they would suffer irreparable harm without the invocation of a Stay; and, further, that the public interest was put at substantial risk by permitting the further participation of the company and Fernandez in crowdfunding, the SEC found that the stay was not warranted and was accordingly denied.