December 4, 2017 – The firm was named a respondent in a FINRA complaint alleging that it made unsuitable recommendations to its customers for the purchase of $413,000 of convertible notes of a non-public company through a private placement offering conducted by the firm. The complaint alleges that the company’s principals founded it to develop a digital sign business, however it had no leases in place and no sites committed to displaying the signs. Nevertheless, the firm recommended the purchase of the notes to the customers without a reasonable basis to believe that the recommendation was suitable for any investor and before the firm’s due diligence was completed. The firm failed to identify and investigate inconsistencies and apparently inaccurate information related to the company’s leases in documents and other materials it provided. Additionally, the firm failed to identify and investigate litigation and liens related to officers and predecessors of the company that could affect its assets and business. The firm also failed to question the lack of a substantive executive summary not attached to the note purchase agreement despite the agreement specifically referencing such a document. The firm further failed to adequately investigate and address the company’s corporate status and SEC filings, even after the firm’s counsel raised those issues. The complaint also alleges that the firm distributed to potential investors misleading materials the company created that contained false or misleading statements about the existence or status of leases or lease commitments it allegedly held for digital signage sites, and lacked any discussion of the risks involved in the note investment. While the note purchase agreement contained risk disclosures, it failed to discuss risks related to the principal’s prior securities fraud litigation, and judgments and liens that could affect the company’s assets and business. The complaint further alleges that the firm, through Disciplinary and Other FINRA Actions 45 February 2018 a registered representative, failed to adequately supervise the due diligence and failed to adequately respond to red flags presented. In addition to the due diligence being inadequate, there was no documented record of due diligence conducted or if it was ever completed. The firm’s WSPs for private placement due diligence were inadequate, and its procedures were overly general and did not provide adequate guidance on how to conduct due diligence. In addition, the procedures mentioned the need to meet a minimum set of standards before the firm would participate in an offering but failed to identify those standards. In addition, the complaint alleges that the firm willfully violated Securities Exchange Act of 1934 Rule 15c2-4(a) and FINRA Rule 2010 when it did not promptly transmit a customer’s $50,000 check to the company to pay for an investment in its notes. Moreover, the complaint alleges that by holding the customer’s check, the firm no longer qualified for a net capital exemption, and as a result it willfully violated Securities Exchange Act of 1934 Rule 15c3-1 and FINRA Rule 2010. Furthermore, the complaint alleges that the firm did not make a required daily calculation or set up a special reserve account during the period in which it improperly retained the customer’s check. As a result, the firm willfully violated Securities Exchange Act of 1934 Rule 15c3-3 and FINRA Rule 2010 because it no longer qualified for an exemption to the customer protection rule. (FINRA Case #2014041862701).
In a related matter, the Securities and Exchange Commission filed a complaint in the U.S. District Court for the Western District of Washington on December 4, 2017 against DONALD E. MacCORD, JR., SHANNON D. DOYLE, and DIGI OUTDOOR MEDIA, INC. (“DOM”). The SEC complaint alleges inter alia that the DOM securities offering was fraudulent and that in February 2015, Digi filed a registration statement with the Commission, seeking to sell shares of the company to the public. The registration statement painted a misleading picture for prospective investors about Digi’s ability to generate revenue, its financial condition, and its prospects for success. See, https://www.sec.gov/litigation/complaints/2017/comp24001.pdf.