FINRA Imposes Death Penalty on BD Selling Ponzi Scheme
FINRA meted out the death penalty by expelling a brokerage firm that sold interests in private placements that FINRA claimed were Ponzi schemes. According to FINRA, the firm misrepresented that the funds would be used to purchase oil and gas interests when they were actually commingled and used to pay other investors. The firm’s sole business was to distribute private placement interests offered by its affiliate. FINRA said that the action is the first in an “initiative involving active examinations and investigations of broker-dealers involved in retail sales of private placement interests, as well as broker-dealers affiliated with private placement issuers.” FINRA declared that it is reviewing “firms’ compliance with suitability, supervision and advertising rules, as well as potential instances of fraud.”
OUR TAKE: Here comes FINRA, imposing its regulatory muscle with respect to fraudulent offerings. FINRA has imposed a due diligence and fair disclosure obligation on BD firms at least as far back as Notice to Members 03-07. Although this action involves an affiliate of the issuer, we don’t believe that fact will matter as FINRA’s “initiative” continues.