To raise capital, brokerage firms sometimes sell their own or an affiliate's securities. Such broker-dealer self-offerings (BDOs) can take the form of registered public offerings or private placements. While private BDOs can be legitimate investments, recent NASD and U.S. Securities and Exchange Commission enforcement actions have highlighted the potential for abuse in private BDOs. To help investors understand what private BDOs are, the risks involved, and telltale signs of fraud or other misconduct, NASD has issued the Investor Alert Brokerage Firm Private Securities Offerings: Buying Your Brokerage. It can be accessed at http://www.nasd.com/Investor/Alerts/bdos.htm.
In the current enforcement action, NASD charged that in various rounds of the offerings, Investprivate used private placement memoranda that contained material misrepresentations and omitted material facts concerning Mathis's regulatory history, management experience, and history of tax liens; incentive compensation paid to the firm's brokers to induce them to sell the self-offerings, and use of offering proceeds to pay undisclosed commissions to Mathis through Investprivate and to pay Mathis's personal expenses. These rounds raised approximately $12.3 million. NASD's complaint also charges that Investprivate and Mathis violated the Securities Act of 1933 by engaging in the offer and sale of unregistered securities in connection with the entire $17.6 million raised.
"The use of fraudulent or misleading offering materials in connection with a stock offering is a very serious violation of both the federal securities laws and NASD rules," said NASD Vice Chairman Mary L. Schapiro. "That a registered firm would engage in such egregious conduct when selling its own securities is an affront to the investing public, to the securities industry and to the fundamental principles of fair dealing embodied in our rules of conduct."
Additionally, NASD charged Mathis with failing to disclose to NASD that the IRS had filed five tax liens against him - totaling over $600,000 - for failing to fully pay personal income taxes for six years between 1993 and 2000.
Donald Geraghty, Investprivate's Director of Compliance, was charged with supervisory and other violations. Ronald Robbins, Executive Vice President of Investprivate's parent company, was charged with participating in the management of Investprivate without being registered with NASD in any capacity.
Under NASD rules, the individuals and firms named in a complaint can file a response and request a hearing before an NASD disciplinary panel. Possible sanctions include a fine, an order to pay restitution, censure, suspension, or bar from the securities industry.
Recent NASD and SEC enforcement actions involving private BDOs include:
- SEC v. Tecumseh Holdings Corporation, et al. (July 25, 2003)
- SEC v. Discover Capital Holdings Corp., et al. (July 10, 2003)
- SEC v. Thomas Fletcher & Co. Inc. et al. (November 22, 2002)
- NASD Regulation Sanctions Providential Securities, Inc. and Bars Principal, Henry Fahman (December 15, 2000)
- SEC v. Aron O. Bronstein et al. (February 17, 2000)
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm through NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2003, members of the public used this service to conduct more than 2.9 million searches for existing brokers or firms and requested almost 180,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to the program by going online to www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business—from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web Site at www.nasd.com.
