Stephen Douglas Pizzuti (Puttuti) and David Walton Matthews, Jr. (Matthews) were recently suspended for three months by the Financial Industry Regulatory Authority (FINRA) over allegations that Pizzuti failed to adequately inquire into Richard’s Pizzuti (Richard) and Daniel Voccia’s (Voccia) outside business activities and involvement in private securities transactions despite his knowledge of their activities. To that end, Pizzuti failed to follow up on “red flags” regarding Richard’s and Voccia’s investment activities. In addition, FINRA also found that Matthews, Merrimac’s Chief Compliance Officer, also failed to supervise Richard and Voccia investment activities.
Pizzuti controls Merrimac Corporate Securities, Inc. (Merrimac) and was the firm’s Chef Executive Officer during the relevant period. Pizzuti, as the managing principal of Merrimac and the firm’s CEO, had overall responsibility for the Merrimac’s compliance policies. Matthews became President of Merrimac in early 2004. Matthews was also the Merrimac’s Chief Compliance Officer until mid-2008 but thereafter and remained the Merrimac’s President. Matthews reports directly to Pizzuti.
FINRA found that from at least 2006 to April 2009, Pizzuti failed to reasonably supervise the outside business activities and private securities transactions of Richard and Voccia. Both Richard and Voccia were registered representatives at Merrimac.
FINRA alleged that Richard and Voccia operated a company called WPH LLC (WPH). Richard and Voccia solicited approximately 30 individuals to invest in WPH raising over $4 million. FINRA also alleged that Richard and Voccia hid their wrongful private securities activities by having their clients hold their WPH investments away from Merrimac’s clearing firm with non-broker-dealer custodians.
WPH’s apparent purpose was to raise capital for and develop businesses. WPH held ownership interests in companies involved in coffee shop franchises, marketing and manufacture of home and business security systems, cooling devices for construction helmets, and truck wash franchises. According to FINRA, in 2006, Voccia and/or Richard informed Matthews that they established WPH to invest in and develop the foregoing enterprises. Matthews allegedly orally approved Richard and Voccia to engage in outside business activity relating to WPH. Matthews also approved the solicitation of one client but did not approve Richard and Voccia to solicit other investors. Nonetheless, FINRA found that Richard and Voccia solicited approximately 30 individuals to invest in WPH between 2006 and April 2009.
Richard and Voccia sold these investors interest-bearing WPH promissory notes. The terms of the WPH notes provided that WPH would return the principal loan amount to the noteholder upon the maturity of the loan, unless the noteholder elected to convert the loan to an equity interest in WPH. In addition to the promissory notes, WPH offered equity membership units to raise up to $2.5 million. The WPH private placement memorandum stated that Richard and Voccia were each entitled to salaries of $5,000 per month as business managers of WPH.
In early 2009, WPH had problems making timely interest payments to the holders of its promissory notes. FINRA found that Matthews failed to make appropriate and reasonable inquiries prior to approving Richard’s and Voccia’s involvement in WPH. FINRA found that Matthews failed to carefully review the promissory note and therefore approved Richard’s and Voccia’s activities without obtaining an adequate understanding about the nature of the activities being approved. FINRA also found that Pizzuti knew that Richard and Voccia established WPH to invest in and develop various businesses.
WPH was not the only private placement offering that FINRA alleged Pizzuti and Matthews failed to supervise. In October 2008, Richard notified the Merrimac in writing that he had been asked to serve as Vice President of CMC Properties LLC (CMC), a real estate development company. According to FINRA, Richard disclosed to Matthews that CMC would be issuing secured interest-bearing notes to a small number of investors to finance the purchase of a commercial building in Florida.
Matthews approved Richard’s participation in the private placement offering of up to $1 million of CMC promissory notes. The annual interest payments on the CMC notes was 7% and the maturity date was March 2019. FINRA found that Matthews did not document the identities of the customers he had approved Richard’s sales of CMC. FINRA alleged that despite Matthew’s statements in his approval letter for the sale of CMC, the Merrimac did not review the sales of CMC notes to Merrimac customers.
FINRA found that Pizzuti’s and Matthews conduct violated NASD Rules 3010 and 2110 and FINRA Rule 2010 (Inadequate Supervision). The attorneys at Gana LLP are experienced in investigating claims involving private placements. Our attorneys can help you detect and uncover suspicious activity in your accounts. Our consultations are free of charge and the firm is only compensated if you recover.