UNITED STATES SECURITIES AND EXCHANGE COMMISSION

SEC Admin Release 34-77625; IA Release 4368; Investment Company Act Release 32073/ April 14, 2016: The Securities and Exchange Commission deems it appropriate and in the public interest to enter this Order Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act), Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 (Advisers Act), and Section 9(b) of the Investment Company Act of 1940 (Investment Company Act) against Reid Johnson. From at least 2010 until it withdrew its registration with the Commission in March 2013, Johnson's firm had custody of certain client funds and securities, including funds and securities of pooled investment vehicles whose managing members were entities owned and controlled by Johnson. The firm and the managing members of the pooled investment vehicles (the Managing Members) functioned together with the firm as a single integrated investment adviser, with the pooled investment vehicles among its advisory clients. Johnson provided investment advice on behalf of both the firm and the Managing Members. Johnson and the firm also advised the firm's clients to invest in the pooled investment vehicles. Almost all of the investors in the pooled investment vehicles were the firm's advisory clients. Furthermore, the firm and the Managing Members did not conduct themselves as separate entities in dealing with outside parties. Johnson and other employees of the firm used the firm's email to conduct business on behalf of the Managing Members. The firm and the Managing Members failed to observe corporate formalities. They were all under Johnson's common control and had no separate boards of directors. In addition, there were no policies and procedures in place to keep these entities separate, or to protect investment advisory information for one of these entities from disclosure to the others. To the contrary, all of the firm's employees, who also worked for the Managing Members, had unlimited access to servers shared by the firm and the Managing Members. Johnson had access to investment information for all of these entities whenever he made an investment decision for any of them. As the firm's founder, owner, president, and managing director during 2010- 2012, and its chief compliance officer during the majority of this time period, Johnson, through his conduct, willfully aided and abetted and caused the firm's violations of the Custody Rule (Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder). The firm violated the Custody Rule because it failed to accurately determine the securities over which it had custody; failed to ensure the securities were maintained by a qualified custodian; and failed to obtain adequate surprise examinations. In addition, Johnson, through his conduct, willfully aided and abetted and caused the firm's violations of the Compliance Rule (Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder). In 2010, the firm had a written compliance manual entitled, 2010 Compliance Supervisory Guidelines Manual (the Compliance Manual). The Compliance Manual's discussion of the Custody Rule failed to reflect the fact that the 2009 amendments made annual surprise examinations mandatory for all advisers subject to the Custody Rule (with some narrow exceptions). Johnson knew, or was reckless in not knowing, that his conduct would substantially assist the firm's violations of the Compliance Rule, and knew, or should have known, that his conduct would cause these violations. Johnson willfully made materially false representations in the firm's Forms ADV filed from 2010 through 2012. Johnson willfully aided and abetted and caused the firm's violation of Section 206(4) of the Advisers Act and Rule 206(4)-2 and 206(4)-7 promulgated thereunder, and willfully violated Section 207 of the Advisers Act.

Order

Bar (Permanent)

see comments

see comments

4/14/2016

participating in any offering of a penny stock

see comment

4/14/2016

Cease and Desist

Civil and Administrative Penalty(ies)/Fine(s)

$45,000.00

Prohibition

Undertaking

FINRA

WILLFULLY VIOLATED SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10B-9, VIOLATED FINRA RULES 2010, 3010(B), 3110: JOHNSON WILLFULLY VIOLATED THE APPLICABLE SECURITIES EXCHANGE ACT BY WITHDRAWING THE $300,000 FROM THE ESCROW ACCOUNT OF AN ISSUER, BEFORE HIS MEMBER FIRM HAD RECONFIRMED INVESTMENTS FOR ALL OF THE INVESTORS, THEREBY SATISFYING THE MINIMUM SALES CONTINGENCY. JOHNSON'S FIRM WAS PLACEMENT AGENT IN A PRIVATE PLACEMENT CONTINGENT OFFERING BY THE ISSUER, FOR A MINIMUM OF $1 MILLION AND A MAXIMUM OF $4.1 MILLION UNITS OF PARTICIPATION AT $1 PER UNIT, WITH A TERMINATION DATE. THE PRIVATE PLACEMENT MEMORANDUM (PPM) STATED THAT THE OFFERING, UNLESS EXTENDED, WILL BE TERMINATED AND SUBSCRIPTION FUNDS PROMPTLY RETURNED IF SUBSCRIPTIONS FOR THE MINIMUM OFFERING ARE NOT RECEIVED AND ACCEPTED ON THE TERMINATION DATE. BEFORE THE TERMINATION DATE, $370,000 WAS IN AN ESCROW ACCOUNT FOR THE OFFERING, REPRESENTING FUNDS RECEIVED FROM INVESTORS. THE FIRM ISSUED A SUPPLEMENT TO THE PPM REDUCING THE MINIMUM OF THE OFFERING TO 350,000 UNITS. THE SUPPLEMENT ALSO STATED THAT ALL SUBSCRIBERS WITH FUNDS IN ESCROW AS OF THE DATE OF DISTRIBUTION OF THIS SUPPLEMENT OR THAT OTHERWISE HAVE NOT EXECUTED AND RETURNED A FIRST RESTATED SUBSCRIPTION AGREEMENT ARE ENTITLED TO RESCIND THEIR SUBSCRIPTION AND RECEIVE A RETURN OF THEIR CASH INVESTMENT. THE SUPPLEMENT FURTHER STATED THAT IN ORDER TO RATIFY THEIR INVESTMENT, SUBSCRIBERS MUST EXECUTE AND RETURN A FIRST RESTATED SUBSCRIPTION AGREEMENT. THEREAFTER, ALTHOUGH ONLY SOME OF THE INVESTORS HAD RETURNED SIGNED FIRST RESTATED SUBSCRIPTION AGREEMENTS TO THE FIRM, THE FIRM INSTRUCTED THE ESCROW AGENT TO WIRE $300,000 FROM THE ESCROW ACCOUNT TO A COMPANY TO PURCHASE 240,000 SHARES OF THAT COMPANY'S STOCK, AND IT SOLD ADDITIONAL UNITS TO INVESTORS. APPROXIMATELY TWO YEARS LATER, AND AFTER FINRA BEGAN ITS INVESTIGATION INTO THIS MATTER, THE FIRM OBTAINED SIGNED COPIES OF FIRST RESTATED SUBSCRIPTION AGREEMENTS FROM THE INITIAL INVESTORS WHO HAD NOT SIGNED SUCH AGREEMENTS PRIOR TO THE FIRM RELEASING FUNDS FROM THE ISSUER'S ESCROW ACCOUNT. JOHNSON SIGNED FIRST RESTATED SUBSCRIPTION AGREEMENTS WITH A FALSE DATE, AND THEREBY CAUSED THE BOOKS AND RECORDS OF THE FIRM WITH RESPECT TO THE ISSUER'S OFFERING TO BE INACCURATE. THE MANNER IN WHICH THE FUNDS WERE TO BE USED WAS MISREPRESENTED IN THE SUPPLEMENT TO THE ISSUER'S PPM, FOR WHICH JOHNSON WAS RESPONSIBLE. THE SUPPLEMENT STATED THAT APPROXIMATELY $28,815 WOULD BE USED TO FUND A LIMITED PARTNERSHIP TO ACQUIRE THE LIFE INSURANCE POLICY AND THAT THE ACQUISITION OF 100% OF THE EQUITY INTEREST OF A LIMITED PARTNERSHIP WHICH HOLDS A LIFE INSURANCE POLICY WAS PART OF THE INVESTMENT STRATEGY OR THE ISSUER. THE ISSUER DID NOT PURCHASE THE LIFE POLICY AS PART OF ITS INVESTMENT STRATEGY. THE FIRM, ACTING THROUGH JOHNSON, DID NOT ESTABLISH, MAINTAIN AND ENFORCE WRITTEN PROCEDURES DESIGNED TO ACHIEVE COMPLIANCE WITH APPLICABLE SECURITIES LAWS AND REGULATIONS WITH RESPECT TO CONTINGENCY OFFERINGS.

Acceptance, Waiver & Consent(AWC)

Civil and Administrative Penalty(ies)/Fine(s)

$15,000.00

Suspension

ALL CAPACITIES

45 BUSINESS DAYS

11/4/2013

1/8/2014

WITHOUT ADMITTING OR DENYING THE FINDINGS, JOHNSON CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS; THEREFORE, HE IS FINED $15,000 AND SUSPENDED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY FOR 45 BUSINESS DAYS. THE FINE IS DUE AND PAYABLE IMMEDIATELY UPON RE-ASSOCIATION WITH A MEMBER FIRM FOLLOWING HIS SUSPENSION OR PRIOR TO ANY APPLICATION OR REQUEST FOR RELIEF FROM ANY STATUTORY DISQUALIFICATION RESULTING FROM THIS OR ANY OTHER EVENT OR PROCEEDING, WHICHEVER IS EARLIER. THE SUSPENSION IS IN EFFECT FROM NOVEMBER 4, 2013, THROUGH JANUARY 8, 2014. RESPONDENT UNDERSTANDS THAT THIS SETTLEMENT INCLUDES A FINDING THAT HE WILLFULLY VIOLATED SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934 AND THAT UNDER ARTICLE III, SECTION 4 OF FINRA'S BY-LAWS; THIS MAKES RESPONDENT SUBJECT TO A STATUTORY DISQUALIFICATION WITH RESPECT TO ASSOCIATION WITH A MEMBER.