Initiated By
FINRA
Allegations
SECTION 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934 (EXCHANGE ACT) AND RULE 10B-5 THEREUNDER, FINRA RULES 2010, 8210, NASD RULES 2110, 2120, 2330, 3010, INTERPRETATIVE MATERIAL (IM) 2310-2: A MEMBER FIRM, ACTING THROUGH SMITH, CONDUCTED FRAUDULENT UNREGISTERED SECURITIES OFFERINGS INVOLVING THE SALE OF INCOME NOTES, ISSUED BY LIMITED LIABILITY COMPANIES MANAGED AND CONTROLLED BY SMITH. THE INCOME NOTES, WHICH ARE SECURITIES, WERE NOT REGISTERED OR ELIGIBLE FOR AN EXEMPTION FROM REGISTRATION. SMITH AND HIS FIRM OSTENSIBLY RELIED UPON THE EXEMPTION PROVIDED BY REGULATION D. THAT EXEMPTION, HOWEVER WAS NOT AVAILABLE BECAUSE THE INCOME NOTE OFFERINGS HAD NON-ACCREDITED INVESTORS. ALL OF THE NOTE OFFERINGS HAD THE SAME STRUCTURE AND WERE SOLD PURSUANT TO A "CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM" THAT CONTAINED VIRTUALLY IDENTICAL DISCLOSURES, TERMS AND INFORMATION. SMITH, ACTING ON BEHALF OF THE INVESTMENT ADVISOR OF THE LIMITED LIABILITY COMPANIES, MISUSED THE MAJORITY OF OFFERINGS PROCEEDS FOR HIS OWN NEEDS AND TO BENEFIT ENTITIES THAT HE AND OTHER INDIVIDUALS OWNED, CONTROLLED, AND/OR IN WHICH THEY MAINTAINED A FINANCIAL INTEREST. SMITH CONTROLLED, AND HAD AN OWNERSHIP INTEREST IN THE INVESTMENT ADVISOR. SMITH MISUSED MILLIONS OF INVESTOR FUNDS, DIRECTING FUNDS TOWARDS RELATED ENTITIES AND MAKING LOANS FOR THOSE COMPANIES. SMITH AND THE RELATED ENTITIES RECEIVED A DIRECT FINANCIAL BENEFIT FROM THESE TRANSACTIONS. DURING THE OFFERING PERIOD, SMITH ALSO MISREPRESENTED TO INVESTORS THE UNDERWRITING/COMMISSION FEE THAT THE FIRM WOULD RECEIVE. THE LIMITED LIABILITIES COMPANIES DEFAULTED ON THE INCOME NOTES. SMITH SENT LETTERS TO INVESTORS MISREPRESENTING THAT THE FIRM AND RELATED ENTITIES WOULD WAIVE OR FORGO FURTHER FEES AND COMMISSIONS DUE TO THE POOR FINANCIAL CONDITION OF THE INCOME NOTE ISSUERS. CONTRARY TO THOSE REPRESENTATIONS, HOWEVER, THE FIRM AND RELATED ENTITIES TOOK MILLIONS IN FEES AND COMMISSIONS. HE ALSO FAILED TO DISCLOSE THAT THE BASIS FOR THE POOR FINANCIAL CONDITION WAS DUE, AT LEAST IN PART, TO HIS DECISION TO LEND/INVEST THE MAJORITY OF INVESTORS FUND IN ONE OF THE ILLIQUID RELATED ENTITIES THAT HAD LIMITED OR NO REVENUES OR WERE IN FINANCIAL DISTRESS. SMITH, IN CONNECTION WITH THE PURCHASE OR SALE OF SECURITIES, DIRECTLY OR INDIRECTLY, BY THE USE OF THE MEANS OF INSTRUMENTALITIES OF INTERSTATE COMMERCE, OR OF THE MAILS, OR OF ANY FACILITY OF ANY NATIONAL SECURITIES EXCHANGE, KNOWINGLY OR RECKLESSLY:EMPLOYED DEVICES, SCHEMES OR ARTIFICES DEFRAUD; MADE UNTRUE STATEMENTS OF MATERIAL FACTS OR OMITTED TO STATE MATERIAL FACTS NECESSARY IN ORDER TO MAKE THE STATEMENTS MADE, IN THE LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING; ENGAGED IN ACTS, PRACTICES, OR COURSES OF BUSINESS WHICH OPERATED OR WOULD OPERATE AS A FRAUD OR DECEIT UPON ANY PERSON; OR EFFECTED TRANSACTIONS IN, OR INDUCED THE PURCHASE OR SALE OF, ANY SECURITY BY MEANS OF ANY MANIPULATIVE, DECEPTIVE OR OTHER FRAUDULENT DEVICE OR CONTRIVANCE. THE FIRM, ACTING THROUGH SMITH, FAILED TO ESTABLISH AND MAINTAIN A SUPERVISORY SYSTEM AND FAILED TO ESTABLISH, MAINTAIN AND ENFORCE WRITTEN SUPERVISORY PROCEDURES, THAT WERE REASONABLY DESIGNED TO ACHIEVE COMPLIANCE WITH THE APPLICABLE SECURITIES LAWS AND REGULATIONS AND FINRA RULES APPLICABLE TO PRIVATE SECURITIES OFFERINGS AND RELATED SUITABILITY, DISCLOSURE, VERIFICATION OF INVESTOR ACCREDITATION STATUS AND OTHER SALES PRACTICE-RELATED ISSUES WITH RESPECT TO THE NOTE OFFERINGS. AS THE FIRM'S CHIEF COMPLIANCE OFFICER AND A SUPERVISORY PRINCIPAL, SMITH REVIEWED AND ACCEPTED THE INDIVIDUAL INVESTMENTS FOR THE INCOME NOTE OFFERINGS AND MANY OF THE DOCUMENTS HE APPROVED WERE DEFICIENT, WITH INCOMPLETE OR MISSING FINANCIAL INFORMATION. SMITH, WITH ANOTHER INDIVIDUAL, SUBMITTED FALSE DOCUMENTS TO FINRA. HE PROVIDED PROMISSORY NOTES TO FINRA STAFF KNOWING THAT THE DATES REFLECTED THEREON WERE FALSE AND DID NOT ADVISE FINRA STAFF THAT THE COPIES OF PROMISSORY NOTES PROVIDED HAD BEEN BACKDATED.
Resolution
Decision
Bar
Bar (Permanent)
Registration Capacities Affected
All Capacities
Duration
Indefinite
Start Date
10/12/2011
Regulator Statement
DEFAULT DECISION RENDERED SEPTEMBER 14, 2011 WHERE IN SMITH IS FOUND TO HAVE MISUSED INVESTOR FUNDS, IN VIOLATION OF NASD CONDUCT RULES 2110 AND 2330; MADE MISREPRESENTATIONS AND OMISSIONS OF MATERIAL FACTS IN CONNECTION WITH THE SALES OF SECURITIES, IN VIOLATION OF SECTION 10(B) OF THE SECURITIES EXCHANGE AND RULE 10B-5 THEREUNDER, AND NASD RULES 2110, 2120 AND IM-2310-2; SOLD UNREGISTERED SECURITIES, IN VIOLATION OF NASD RULE 2110; MADE MISREPRESENTATIONS AND OMISSION OF MATERIAL FACT IN COMMUNICATIONS WITH INVESTORS, IN VIOLATION OF NASD RULE 2110; FAILED TO ESTABLISH AND MAINTAIN A SUPERVISORY SYSTEM AND TO ESTABLISH, MAINTAIN, AND ENFORCE WRITTEN SUPERVISORY PROCEDURES REASONABLY DESIGNED TO ACHIEVE COMPLIANCE WITH THE APPLICABLE SECURITIES LAWS AND FINRA RULES RELATED TO PRIVATE SECURITIES OFFERINGS, SUITABILITY, DISCLOSURE, AND VERIFICATION OF INVESTOR ACCREDITATION STATUS, IN VIOLATION OF NASD RULE 2110 AND 3010; AND PROVIDED FALSE DOCUMENTS IN RESPONSE TO REQUESTS FOR INFORMATION ISSUED PURSUANT TO FINRA RULE 8210, IN VIOLATION OF FINRA RULES 2010 AND 8210, THEREFORE, HE IS BARRED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY. DECISION IS FINAL ON OCTOBER 12, 2011.
