Initiated By
FINRA
Allegations
SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 10B-5 THEREUNDER, FINRA RULES 2010, 8210, NASD RULES 2110, 2120, 2310, 3110, INTERPRETATIVE MATERIAL 2310-2: SMALBACH MADE FRAUDULENT MISREPRESENTATIONS AND MATERIAL OMISSIONS WHEN SELLING PREFERRED SHARES IN AN ENTITY'S PRIVATE PLACEMENTS. SMALBACH FALSELY TOLD INVESTORS THAT THEIR INVESTMENT IN THE ENTITY WAS A SAFE HIGH YIELD INVESTMENT, VIRTUALLY GUARANTEEING THE CUSTOMERS THAT THEY WOULD RECEIVE AN 18% YEARLY DIVIDEND AND THE RETURN OF THEIR PRINCIPAL IN THREE YEARS. SMALBACH OMITTED TO TELL THE CUSTOMERS ABOUT THE HIGH DEGREE OF RISK ASSOCIATED WITH THIS START-UP NATURAL GAS AND OIL INVESTMENT. SMALBACH CLAIMED TO HAVE CONDUCTED HIS OWN DUE DILIGENCE ON THE ENTITY WHICH INCLUDED REVIEWING THE PRIVATE PLACEMENT MEMORANDUM, SUBSCRIPTION AGREEMENT, PROMOTIONAL MATERIAL AND SPEAKING WITH EMPLOYEES OF THE ENTITY AND HIS MEMBER FIRM'S DUE DILIGENCE PERSONNEL. SMALBACH RESPONDED TO CUSTOMER QUESTIONS WITH A SERIES OF MISREPRESENTATIONS AND MATERIAL OMISSIONS THAT THE INVESTMENT WAS SAFE; THE CUSTOMERS COULD NOT LOSE MONEY; THE COMPANY HAD BEEN IN BUSINESS FOR YEARS; NO CUSTOMER HAD LOST MONEY; THE COMPANY HAD NEVER HIT A DRY WELL; AND INVESTING IN THE ENTITY WAS LIKE INVESTING IN A CERTIFICATE OF DEPOSIT. THE ENTITY WAS NOT A SAFE INVESTMENT BUT WAS AN INVESTMENT IN AN OIL AND GAS STARTUP COMPANY WITH NO SIGNIFICANT ASSETS, CASH FLOW OR OPERATING HISTORY AND WAS ONLY SUITABLE FOR CUSTOMERS WHO COULD AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SMALBACH KNEW OR WAS RECKLESS IN KNOWING THESE FACTS THAT WERE DISCLOSED IN THE ENTITY SUBSCRIPTION AGREEMENT AND THE PRIVATE PLACEMENT MEMORANDUM. SMALBACH ALSO STATED THAT THE ENTITY PAID SUCH A HIGH RETURN BECAUSE BANKS WOULD NOT LEND MONEY TO AN OIL AND GAS VENTURE, WHICH IS PATENTLY FALSE. THE INVESTMENTS WERE UNSUITABLE FOR SMALBACH'S CUSTOMERS BECAUSE OF THEIR ADVANCED AGE, CONSERVATIVE RISK TOLERANCE, LIMITED INVESTMENT EXPERIENCE AND MODEST FINANCIAL RESOURCES. ALSO, THE RETIREES NEEDED TO PRESERVE THEIR CAPITAL DURING THEIR RETIREMENTS. AS A RESULT OF THESE FRAUDULENT MISREPRESENTATIONS, OMISSIONS AND ACTS, SMALBACH CAUSED THE 18 CUSTOMERS WHO INVESTED TO SUSTAIN APPROXIMATELY $840,116 IN NET OUT OF POCKET LOSSES ON THE $925,000 INVESTMENT THAT WAS PURCHASED FOR THEM. FOR THESE 18 CUSTOMERS, SMALBACH RECEIVED $74,000 IN GROSS COMMISSIONS FROM HIS ACTIVITIES. SUBSEQUENT TO THESE INVESTMENTS, THE ENTITY HAD BEEN EXPOSED AS A $480 MILLION PONZI SCHEME. EVEN IF SMALBACH DID NOT KNOW THAT THE ENTITY WAS A PONZI SCHEME, HE KNEW IT WAS A RISKY INVESTMENT FOR ACCREDITED INVESTORS ONLY AND NONETHELESS SOLD IT TO UNACCREDITED INVESTORS AND/OR THROUGH MISREPRESENTING THE NATURE OF THE INVESTMENT. IN ORDER TO OBTAIN HIS FIRM'S APPROVAL FOR THE TRADES, SMALBACH CAUSED FIRM CLIENT INFORMATION NEW ACCOUNT FORMS AND THE INVESTMENT SUBSCRIPTION AGREEMENTS TO BE FALSELY COMPLETED SO THAT THE PROSPECTIVE CUSTOMER WOULD APPEAR TO BE EXPERIENCED AND ACCREDITED INVESTORS, AND SUITABLE FOR THE INVESTMENT, WHEN IN FACT THE CUSTOMER DID NOT HAVE THE REQUIRED NET WORTH, ANNUAL INCOME, RISK TOLERANCE OR INVESTMENT EXPERIENCE TO PURCHASE THE INVESTMENT. CUSTOMERS WHO PURCHASED THE INVESTMENT WERE REQUIRED BY SMALBACH'S FIRM AND THE ENTITY TO BE ACCREDITED INVESTORS. SMALBACH DID THIS IN ORDER TO OBTAIN SUPERVISORY APPROVAL AT HIS FIRM FOR THE PURCHASE OF THE ENTITY AND THE RECEIPT OF THE LUCRATIVE COMMISSIONS FROM THE PURCHASE. SMALBACH ASKED CUSTOMERS TO SIGN THE SUBSCRIPTION AGREEMENT AND INITIAL RISK AND FINANCIAL DISCLOSURES ON THE ENTITY SUBSCRIPTION AGREEMENT WITHOUT GIVING THE CUSTOMER THE OPPORTUNITY TO READ WHAT THEY WERE SIGNING. [CONTINUED IN COMMENT]
Resolution
Decision & Order of Offer of Settlement
Bar
Bar (Permanent)
Registration Capacities Affected
All Capacities
Duration
Indefinite
Start Date
12/7/2011
Regulator Statement
[CONTINUED FROM ALLEGATIONS]: TYPICALLY, SMALBACH WOULD POINT AT THE SPACES WHERE THE CUSTOMER WOULD HAVE TO INITIAL OR SIGN IN ORDER TO EXPEDITE THE COMPLETION OF THE FORM. SMALBACH WOULD INSTRUCT AN ADMINISTRATIVE ASSISTANT TO COMPLETE THE FORMS BY REFERRING TO HANDWRITTEN NOTES WITH CUSTOMER FINANCIAL INFORMATION THAT WERE PROVIDED BY SMALBACH. SMALBACH CAUSED THE INFORMATION ON CLIENT INFORMATION AND ENTITY SUBSCRIPTION FORMS ABOUT THE CUSTOMERS' NET WORTH, ANNUAL INCOME, LIQUID NET WORTH, INVESTMENT EXPERIENCE, INVESTMENT OBJECTIVES, RISK TOLERANCE AND EMPLOYMENT DESCRIPTIONS TO BE FALSE AND EXAGGERATED. SMALBACH'S FALSE REPORTING ENABLED HIM TO SHROUD THESE UNSUITABLE TRANSACTIONS FROM HIS FIRM'S SUPERVISORY REVIEW. BY SUBMITTING THE INACCURATE FORMS TO HIS FIRM, HE CAUSED THE FIRM'S BOOKS AND RECORDS TO BE INACCURATE. SMALBACH FAILED TO COOPERATE WITH FINRA REQUESTS FOR INFORMATION AND DOCUMENTS.
SMALBACH WILLFULLY VIOLATED SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 10B-5 THEREUNDER. SMALBACH ALSO VIOLATED FINRA RULES 2010, 8210, NASD RULES 2110, 2120, 2310, 3110, INTERPRETATIVE MATERIAL 2310-2. WITHOUT ADMITTING OR DENYING THE ALLEGATIONS, SMALBACH CONSENTED TO THE DESCRIBED SANCTION AND TO THE ENTRY OF FINDINGS; THEREFORE, HE IS BARRED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY.
Broker Comment
NOTHING COULD BE FURTHER FROM THE TRUTH. IN MY OPINION, DUE TO THE NUMBER OF FALSE ACCUSATIONS ON MY BROKER CHECK, I AM CONSTRUCTIVELY BANNED FROM THE INDUSTRY. DUE TO THE FACT THAT NONE OF THE LANGUAGE IN THIS COULD BE CHANGED, I AGREED TO THIS. THE TIME AND MONEY EXPENDED ON THIS WOULD BE A WASTE.
