Articles Tagged with Rule 10b-5

The Financial Industry Regulatory Authority (FINRA) has barred broker Richard Manchester (Manchester) over allegations that his participation in several private placements caused his employing firm to fail to establish an escrow account for several contingency offerings, broke escrow before the minimum contingency amounts were met, and made unauthorized use of offering proceeds by lending offering proceeds to other private placements.  FINRA found that Manchester’s acts violated of Section 10(b) of Securities Exchange Act of 1934 and Rules 10b-5 and 10b-9 thereunder, NASD Rule 2110, and FINRA Rules 2020 and 2010.

From July 2004 through December 2010, Manchester was associated with Girard Securities, Inc. (Girard Securities).  During this time Manchester was involved in the offering of several private placement offerings.  One offering was Pacific Yogurt Partners, LLC (Pacific Yogurt) a limited liability corporation formed in 2007 to acquire franchise rights from Golden Spoon Frozen Yogurt.  The Pacific Yogurt private placement offered Series B and Series C Units in a contingency offering requiring the raising of a minimum amount of funds for the offering to proceed.  FINRA alleged that even though the private placement memorandum stated that funds received would be returned to investors if the minimum sales contingency was not met the funds were released to the issuer.  In addition, under the securities laws investor funds received before the satisfaction of the minimum sales contingencies were required to be deposited into a bank escrow account. Instead, FINRA found that the funds provided directly to Pacific Yogurt, the issuer.  FINRA alleged that Manchester’s conduct constituted a willful violation of Rule 10b-9, and a violation of NASD Rule 2110 and FINRA Rule 2010.

Another private placement Manchester was involved in offering was WaveWise, LLC (WaveWise).  WaveWise was created to acquire interest in IdeaEdge, Inc. (IdeaEdge).  The offering sought to purchase up to 2,625,000 shares of IdeaEdge common stock, at $0.80 per share, with warrants to purchase a share of common stock at $1.00 per share for every four shares of common stock purchased at $.80 per share.  Thereafter, IdeaEdge changed its name to Social Wise, Inc. (Social Wise), which subsequently changed to Bill My Parents.  Like Pacific Yogurt, FINRA alleged that investor funds received before the satisfaction of the minimum sales contingency were required to be deposited into a bank escrow but instead were deposited into a bank account in the name of WaveWise.

The Financial Industry Regulatory Authority (FINRA) has barred Chad David Kelly (Kelly) concerning allegations of churning (excessive trading) and unauthorized trading.  “Churning” is excessive investment trading activity that serves little useful purpose or is inconsistent with the investor’s objectives and is conducted solely to generate commissions for the broker.  Churning is also a type of securities fraud.

FINRA alleged that Kelly willfully violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act of 1934”), Rule 10b-5, and violated FINRA Rules 2020, and 2010, NASD Rules 2120, 2110, 2310, and IM-2310(a) and (b).

According to FINRA, excessive trading violation occurs when: 1) a broker has control over the account and the trading in the account, and 2) the level of activity in that account is inconsistent with the customer’s objectives and financial situation.  Where an intent to defraud or reckless disregard for the customer’s interests is present the activity is also churning.  Section 10(b) of the Exchange Act of 1934 prohibits the use of “any manipulative or deceptive act or practice” in connection with the purchase or sale of a security and Rule 10b-5 prohibits “any device, scheme, or artifice to defraud.”  NASD Rule 2310(a) provides that when recommending the purchase, sale, or exchange of any security a broker “shall have reasonable grounds for believing that the recommendation is suitable for such customer…”  A broker’s recommendations must “be consistent with his customer’s best interests.” NASD IM-2310-2(a)(1) also require that the broker must “’have reasonable grounds to believe that the number of recommended transactions within a particular period is not excessive.”  NASD IM-2310-2(b)(2) prohibits brokers from excessively trading in customer accounts.

The Securities and Exchange Commission filed a complaint against Larry J. Dearman (Dearman), Sr. Marya Gray (Gray), Bartnet Wireless Internet Inc., The Property Shoppe, Inc., and Quench Buds Holding Company LLC. Dearman and Gray allegedly created an illegal scheme that fraudulently raised at least $4.7 million from thirty (30) of Deaman’s advisory clients. Dearman promised the clients that their money would be invested into lucrative investments. However, according to the SEC, Dearman and Gray squandered the funds by gambling, paying for personal expenses, and making payments to other businesses controlled by Gray.

Dearman is currently not registered as a broker with FINRA; however Dearman was registered with various brokerage firms from 2005 until 2012. From April 2002 until February 2005 Dearman was registered with the firm AXA Advisors, LLC. Upon leaving AXA Advisors, Dearman joined Brecek & Young Advisors, Inc. until January 2009. From January 2009 until February 2010 Dearman joined  Securities America, Inc. Finally, Dearman was a broker with Cambridge Legacy Securities LLC from February 2010 until May 2012.

The SEC Complaint explains between December 2008 and August 2012 Dearman raised $1.7 million through the sale of promissory notes for Bartnet, a wireless internet service, whose majority shareholder was Gray. In addition, Dearman raised $2 million for a second Gray-controlled company, the Property Shoppe. Finally, in 2012 Dearman recommended his clients invest in Quench Buds, four convenient stores owned by Gray. Instead of investing the capital raised, Dearman and Gray allegedly allocated the funds to personal gambling expenses and payments to investors in the ponzi scheme.

Robert Gist (Gist) was recently fined $5.4 million by the Securities and Exchange Commission (SEC) and barred from association with any broker-dealer by the Financial Industry Regulatory Authority (FINRA).  Gist has been accused by both regulators of converting the funds of at least 30 customers in order to pay personal expenses and to fund the operations of a company controlled by Gist.

Gist resides in Atlanta, Georgia and is the president of Gist, Kennedy & Associates, Inc., (Gist Kennedy) a law firm specializing in estate planning and investments.  Gist is licensed to practice law in Georgia and has represented professional athletes as a sports agent.  From approximately 2002 through early 2013, Gist was CEO and president ENCAP Technologies, LLC (ENCAP), a company with its principal place of business in Roswell, Georgia.  ENCAP is in the business of developing industrial coatings for metal surfaces to prevent corrosion.  Gist has been associated or registered with numerous brokerage firms since the 1980s.  Most recently, Gist was registered with Resource Horizons Group LLC from March 2001 until his December 2011.

On May 31, 2013, the SEC charged Gist and Gist Kennedy with defrauding at least 32 customers out of at least $5.4 million while acting as an unregistered broker from approximately 2003 to the present.  According to the SEC’s complaint filed in the U.S. District Court for the Northern District of Georgia, Gist told customers that he would invest their funds conservatively on their behalves in corporate bonds and other securities.  However, according to the SEC Gist invested none of the customer funds, but, instead, used the funds for his personal expenses.

Darrell G. Frazier (Frazier) was recently barred from the securities industry by the Financial Industry Regulatory Authority (FINRA) over allegations that Frazier made fraudulent statements in the sales of variable annuities.  Frazier is also alleged to have made unsuitable variable annuity sale recommendations to customers.

Frazier first became registered with a FINRA member firm in March 1988.  Frazier was registered with Park Avenue Securities LLC from July 2002 through June 2010.  From August 2010 through May 2011, Frazier was associated with MML Investors Services, LLC.

FINRA alleged that from 2004 to at least 2009, Frazier made materially false and misleading statements in connection with recommending customers purchase variable annuity products issued by Guardian Insurance & Annuity Company, Inc.  A variable annuity is a contract where an insurance company agrees to make periodic payments to an investor either immediately or at some future date.  The purchase of a variable annuity contract either involves a single purchase payment or a series of purchase payments.

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