Advisor Thomas Mikolasko, (Mikolasko) of HFP Capital Markets LLC (HFP) was recently suspended and fined by The Financial Industry Regulatory Authority (FINRA) over allegations that Mikolasko engaged in the sale of $3 million in Senior Secured Zero Coupon Notes sold to 58 customers of HFP for Metals Millings and Mining LLC (MMM) in a private placement offering. The MMM Notes defaulted and investors were not repaid either principal or the 100 percent return promised. FINRA found that Mikolasko negligently caused material misrepresentations and omissions of material facts to be made in connection with the sale of MMM. FINRA also alleged that Mikolasko facilitated the offering even though he knew or should have known that HFP had conducted inadequate due diligence concerning the offering and that the limited due diligence the firm had conducted identified significant “red flags.”
Metals Millings and Mining LLC was an entity created in 2009 with HFP’s assistance. MMM was formed as a vehicle to aggregate and process certain ore materials. The investment’s sponsor had presented to HFP a plan to extract precious metals from the ore concentrate through a process known as “plasmafication.” HFP’s former chief executive, Vincent J. Puma was primary responsibility for HFP’s involvement in the MMM offering. From December 2009 to February 201l, HFP sold approximately $3 million of MMM Notes to 58 HFP customers. The MMM notes provided for the repayment of principal in one year together with the ownership of ore concentrate.
Pursuant to a repurchase agreement, MMM was then obligated repurchase the ore from the investors at an agreed price so that they would receive a 100 percent return on their investment in addition to the return of principal. There was no private placement memorandum for the transaction and investors were provided only with limited disclosures as forth in a subscription agreement. The MMM notes have defaulted and investors have not been repaid either principal or the promised 100 percent return.
FINRA alleged that HFP, through Puma, committed securities fraud and made misrepresentations and omissions of material information to investors. Specifically, FINRA found that the firm made:
- Misrepresentations concerning the ore concentrate that was to serve as collateral for the MMM notes. HFP misrepresented that the ownership of barrels of ore concentrate was going to be transferred to investors when, in fact, the ore was never transferred to investors. FINRA also found that the ore was relatively worthless.
- The MMM note filings failed to disclose a conflict of interests in that Puma was the managing member of an entity that owned a 20% MMM.
- In another conflict of interests the sponsor of the MMM notes took a personal loan of $272,000 from the proceeds of the offering that was not repaid.
All FINRA firms and brokers have an obligation to conduct due diligence prior to selling private placements. FINRA found that HFP sold the MMM notes without having undertaken a reasonable investigation into all of the facts and circumstances surrounding MMM or conducting adequate due diligence. In addition, FINRA also found that the MMM note transactions had not been reviewed or approved by HFP’s investment committee. HFP’s written supervisory procedures required the investment committee approval as a condition to the firm’s involvement in an offering. Consequently, Puma was barred from associating in any and all capacities with a member firm as a result of his failure to cooperate in FINRA’s investigation.
Mikolasko participated in HFP’s due diligence by taking at least two trips to Colorado to meet with the MMM note’s sponsor. FINRA alleged that Mikolasko missed numerous and significant “red flags” regarding the sponsor and MMM’s purported business plans. For example, FINRA found that Mikolasko attended meetings with Puma where the MMM notes were introduced and rolled out to HFP’s retail sales force. During these meetings, HFP’s brokers were provided only limited information concerning MMM and were not told of Puma’s 20% indirect interest in MMM or facts regarding the intended use of offering proceeds such as the sponsor’s personal loan. FINRA found that Mikolasko either knew or should have been aware of these facts based on his involvement in the MMM transaction.
The attorneys at Gana LLP are experienced in investigating claims concerning the sale of 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.