The Financial Industry Regulatory Authority (FINRA) recently barred broker Stephen Michael Brown (Brown) for failing to comply with FINRA’s requests for information concerning allegations that Brown engaged in the unlawful sale of securities. Specifically, at least two customers had brought complaints against Brown alleging that Brown had solicited them to invest in private real estate investments in violation of industry rules.
Brown was formerly registered with FINRA firm LPL Financial Corporation (LPL Financial) from 1989 through May 2009. Thereafter, Brown became associated with Brewer Financial Services, LLC until November 2010. Finally, from November 2010, until May 2011, Brown was an associated person of Best Direct Securities, LLC (Best Direct) a currently inactive FINRA firm. Brown’s public disclosures list Brown as the owner of Steve Brown Ent., a company engaged in real estate business.
The accusations made against Brown are consistent with a “selling away” securities violation. Brokers are required to have their firms approve all securities transactions they participate in, even private financial transactions. Thus, when a broker fails to notify the firm of securities activities he or she “sells away” from the firm. Selling away is prohibited under FINRA Rule 3040, as well as other securities laws. The most common securities products solicited in selling away schemes are private placements and promissory note.
Typically, investors are completely unaware that the broker is acting outside of the normal securities channels. Many times the broker provides investors with fictitious account statements that contain values that the broker manipulates and controls. Sometimes the broker will open a self-directed account that cloaks the illegitimacy of the investment by having a third-party prepare statements and distribute income payments. However, the third-party account statements are also misleading to investors because the broker has complete discretion to manipulate the value and information listed.
On May 5, 2011, Best Direct filed a termination Form U5 on Brown’s behalf with FINRA. The form U5 disclosed that a civil action had been brought against Brown by one of his customers. The suit contained customer allegations that Brown had recommended and engaged in a private real estate investment without first notifying his member firm. On August 7, 2011, LPL Financial filed an amended Form U5 on Brown’s behalf with FINRA disclosing an additional court action against Brown that had been filed by other customers of Brown alleging that he solicited them to make investments with him directly rather than through LPL Financial.
FINRA began an investigation into the allegations disclosed in the Form U5. On November 6, 2012, FINRA issued a written request to Brown to provide information and documents including information concerning investments sold to customers, bank statements, and tax returns. According to FINRA, Brown failed to fully respond to FINRA’s requests for information or provide testimony. Consequently, Brown has been barred from associating with any member firm in any capacity for failing to provide information, documents, and testimony, in violation of FINRA Rules 8210 and 2010.
The attorneys at Gana LLP are experienced in investigating claims concerning the private sale of real estate investments. 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.