"As hedge funds are increasingly marketed to retail investors, the need to disclose all of the risks and material facts becomes paramount. Brokers cannot mislead investors by failing to disclose material facts when selling these or any securities," said Mary L. Schapiro, NASD's Vice Chairman and President of Regulatory Policy and Oversight. . Today's enforcement actions are part of NASD's ongoing review of hedge fund sales and marketing practices and are further examples of NASD's commitment to ensuring that brokerage firms comply with the securities laws and our rules when selling these products."
The three actions are:
- Win Capital Corp., Long Island, New York. NASD charged Win Capital Corp; Steven J. Bayern, the firm's Chairman; and Patrick M. Kolenik, its President, with securities fraud in connection with a hedge fund offering. In July 2002, Bayern and Kolenik formed Huntington Laurel Partners, L.P., a hedge fund, and were the principals of Huntington Laurel Capital Management, LLC, the general partner of the hedge fund. Bayern and Kolenik, through Win Capital, sold limited partnership interests in the hedge fund to 12 investors and raised approximately $1 million.
NASD charged that Bayern and Kolenik assisted in the preparation of the documents for the private placement, including a Confidential Private Offering Memorandum provided to investors in the hedge fund. Win Capital, acting through Bayern and Kolenik, failed to disclose material facts to investors relating to the use of $700,000 of the $1 million raised. Bayern and Kolenik failed to disclose that in September 2002, they used $300,000 of the $1 million to buy a note from a company they jointly controlled, Cyndel & Co. They had previously used Cyndel & Co. to lend $300,000 to a friend and business colleague. Separately, Bayern and Kolenik used $400,000 more of the funds raised from investors in the hedge fund to provide an additional loan to this same friend and colleague. Bayern and Kolenik did not disclose in the Offering Memorandum, or by any other means, this use of proceeds or their self-dealing through the hedge fund's purchase of the note from Cyndel & Co.
- Shelman Securities Corp., Dallas, Texas. NASD charged Shelman Securities Corp and Mark C. Parman, the firm's Chairman, with securities fraud in connection with an unregistered hedge fund offering. The complaint alleges that from 1998 through 2000, Shelman and Parman made fraudulent offers and sales of more than $2 million of unregistered securities in the form of limited partnership interests to at least 104 investors located throughout the United States. Of that amount, approximately 30 percent, or more than $600,000, was paid to Shelman, the exclusive underwriter of the offerings, and Prism Independent Consulting, Inc., an entity owned by Parman, for purported expenses, fees and commissions.
The complaint further charges that Parman, in his capacity as the President and sole owner of Prism, drafted private placement memoranda provided to investors in the offerings that were inaccurate and incomplete. For example, the memoranda falsely stated that funds from the offerings would not be commingled when, in fact, they were. The complaint also charges that none of the securities were registered with the Securities and Exchange Commission or any other regulatory authority and that no exemption from registration was available. Investors who purchased these securities lost at least $1.7 million.
- Neil W. Brooks. In his settlement with NASD, Brooks, a registered representative formerly associated with Allstate Financial Services, agreed to a bar from the securities industry for conducting a fraudulent hedge fund offering. Brooks, who neither admitted nor denied the allegations, consented to NASD charges that during the period from February 2002 through April 2002, he offered and sold securities in the form of limited partnership interests and promissory notes. NASD found that Brooks provided sales materials to investors that contained materially false and misleading information. Among other things, the materials represented that investments would be secured with certificates of deposit in an FDIC-insured financial institution when, in fact, no such certificates of deposit existed.
NASD also found that Brooks engaged in private securities transactions, by failing to provide prior written notice to, and obtain approval from, his employer regarding his activities and that Brooks was not properly licensed to offer and sell securities.
Under NASD rules, an individual named in a complaint can file a response and request a hearing before an NASD disciplinary panel. Possible sanctions include a fine, censure, suspension, or bar from the securities industry, in addition to the request made by NASD in the complaint that the respondents give up any ill-gotten gains and pay restitution.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999 or by sending an e-mail through NASD's Web Site at www.nasd.com.
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 member firms. For more information, please visit our Web Site at www.nasd.com.
