Chief Compliance Officer Cited For Deficient Private Placement Practices

May 23, 2013

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Gary Mitchell Spitz submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Gary Mitchell Spitz, Respondent (AWC 2012030787301, May 14, 2013).

Spitz entered the securities industry in 1988; and since 2004, he was associated with FINRA member firm Mt. Rushmore Securities, LLC where he served as the firm's Chief Executive Officer, Chief Compliance Officer, and a General Securities Principal.  Mt. Rushmore conducted a general securities business from its main office in Fairfield, IA, until it filed a Form BDW on December 31, 2012. Additionally, Spitz was registered with FINRA member firm MidAmerica Financial Services, Inc.  

Un-Checked List

According to the AWC,  as the firm's General Securities Principal, Spitz failed to conduct the following steps required by the firm's written supervisory procedures regarding due diligence of private placements:
  • Review of any financial statements (unaudited or audited) of Blue Sky Capital LLC ("BSC") and The Blue Sky Fund ("TBSF") [BSC was the manager of TBSF];
  • Visit to the issuer's office;
  • Review the background and/or qualifications of individual(s) responsible for the management of, and investment decisions for, the issuer;
  • Review of any and all formation documents to evidence the formation and existence of the issuer; and 
  • Make an attempt to determine if the projected internal rate of returns made in the offering memorandum were viable projections.
SIDE BAR: TBSF was a Regulation D, Rule 506 private offering of up to $2 million. The fund's investment strategy was to:
  • invest in Southern California residential foreclosure and short sale properties; 
  • repair the properties; and 
  • "flip" them to maximize profit.
As a result of Spitz's deficient review, the AWC alleged that during the relevant period of January 2011 to March 2012 while associated with Mt. Rushmore, he failed to:
  • conduct adequate initial and ongoing due diligence of TBSF
  • ensure that the TBSF offering memorandum contained audited financials; and, 
  • ensure that audited financials were available to the non-accredited investors prior to the time of sale, which is a requirement of Regulation D.
Not So Due Diligence

During the relevant period, the AWC further alleges that Spitz permitted three Mt. Rushmore registered representatives (who had associated with that firm in order to sell TBSF shares and were also BSC employees) to submit offering documents executed by customers directly to TBSF. 

The AWC asserts that ten customers (representing 59% of those who invested in TBSF) invested in the deal before Spitz had even received their subscription documents. Pointedly, the AWC asserts that Spitz failed to ensure that the three selling reps undertook reasonable efforts to ascertain the investing customers financial status, investment objectives, and risk tolerance. By not requiring originals and/or copies of the documents also be provided to Mt. Rushmore, Spitz was unable to conduct suitability reviews of the transactions prior to their execution. 

Email

During the relevant period, the AWC further alleges that Spitz permitted the three selling reps to use a BSC email address to communicate with prospects and customers. It seems that some of the emails contained exaggerated, unwarranted and potentially misleading statements to customers and prospects. 

The AWC alleges that the outside email communications were not captured on Mt. Rushmore's server and the firm did not insist upon copies. The AWC asserted that Mt. Rushmore had no procedures in place to ensure that the dually employed reps outside email was forwarded to Spitz for his review and retention.  As a consequence, Mt. Rushmore failed to conduct any review of the emails or to retain email communications from a non-firm email address used for securities business. 

Sanctions

In accordance with the terms of the AWC, FINRA imposed upon Spitz a $5,000 fine and a a one-year suspension from association with any FINRA broker-dealer in any principal capacity.

Bill Singer's Comment

Compliments to FINRA on presenting a cogent and compelling AWC.  

In recent years. we have seen enhanced regulatory scrutiny of email policies and the due diligence review of private placements.  Industry participants would be well served to consider the punchlists set forth in this AWC.