In response to the filing of a Complaint on October 19, 2012, by the Department of Enforcement of the Financial Industry Regulatory Authority ("FINRA"), Respondent Wade H. Bradley submitted an Offer of Settlement dated July 24, 2013, which the regulator accepted. Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondent Wade H. Bradley consented to the entry of findings and violations and to the imposition of the sanctions. FINRA Department of Enforcement, Complainant, vs Wade H. Bradley, Respondent (Offer of Settlement, 2011025780101, July 23, 2013).
SIDE BAR: The Offer of Settlement asserts that the settlement was submitted on July 24, 2013, one day after the July 23, 2013, date on which it was accepted - an interesting bit of magic.
From 2005 to September 10, 2012, Bradley was associated with former FINRA member IndieVest Securities, Inc. and served as the firm's President and Chief Compliance Officer. On July 11,2012, IndieVest Securities filed a Form BDW requesting a full withdrawal of its FINRA membership, which was granted on September 10, 2012.
Case of Characters
- IndieVest, Inc. was formed in July 2005 by Bradley (who also served as Chief Executive Officer and was an equity owner) as a vehicle to aggregate high net worth individuals who want to be involved in entertainment industry events and activities, for which they paid an annual membership fee.
- IndieVest Pictures, Inc. was a wholly owned subsidiary of IndieVest, Inc and on December 1, 2011, Bradley became its interim President.
- Knights of Badassdom Production, LLC (''KOB") was formed on June 5, 2009 to aggregate the capital necessary to finance, produce and exploit a feature-length motion picture entitled "Knights of Badassdom." KOB issued a Rule 506 "part-or-none" offering that commenced on June 9, 2009, and was intended to raise a minimum (the "mini") of $5,550,000.00 and a maximum (the "max") of $18,500,000.00. IndieVest Pictures was KOB's manager. IndieVest Securities ws the only participating broker-dealer.
- Knights of Badassdom Production I, LLC ("KOB1") was formed on September 4, 2009, to finance the motion picture after the minimum subscription amount was elevated to $7,500,000.00. IndieVest Pictures was KOB1's manager.
Sweet Sweetback's Baadasssss Song Badass Knights Of Badassdom Offering
The KOB Confidential Private Placement Memorandum ("PPM") dated June 9, 2009, offered its units on a best-efforts mini-max (part-or-none) basis consisting of $50,000 units. If the $5.5 million mini was not satisfied by December 31, 2009 (unless extended by KOB for an additional 180 days), KOB would not accept any further subscriptions and return previously-received investors' funds. Deutsche Bank National Trust Company entered in a Subscription Escrow Agreement.
Between July 30, 2009 and September 4, 2009, Bradley, through IndieVest Securities, raised only $600,000 from twelve investors. At that point, IndieVest Pictures (KOB's Manager) determined that the motion picture's budget and the offering needed to be changed to accommodate so-called elevated financial demands.
A Not-So Sweet Badassdom Refrain
On September 4, 2009, KOB1 was created to finance and produce the "the Knights of Badassdom" through a Regulation D $7.5 million / $20.6 million mini-max offering in which IndieVest Pictures was the manager and its affiliate, IndieVest Securities, was the selling broker dealer. The mini expiration date set at March 31, 2010, subject to a 180 day extension.
Between October 10, 2009 and December 3, 2009, eleven of the twelve KOB investors directed that their investments be transferred to KOB 1, where it would be maintained in escrow and applied to the new mini pursuant to an Addendum to the Subscription Escrow Agreement. By March 31,2010, KOB1's escrow account held only $1,775,000 and the 180 day extension was activated with an extended deadline of September 27, 2010.
On June 7, 2010, IndieVest Pictures informed KOB1 investors that:
- KOB1 had been able to achieve "material savings" on the motion picture's budget;
- escrow would break at $4.5 million;
- IndieVest intended on breaking escrow on June 15, 2010; and
- the Motion Picture would go into production on July 8, 2010.
A letter was submitted for each investor's signature along with an Amendment and Modification of Private Placement Memorandum ("First Amendment"), providing for assent to the mini reduction from $7.5 to $4.5 million. Escrow did not break on June 15, 2010, and the cash balance in the escrow account was only $1,975,000.00. The FINRA Offer of Settlement alleges that neither Bradley nor anyone else at IndieVest Securities tracked when investors returned executed First Amendments.
On July 2, 2010, Bradley signed a letter that purported to "confirm" that IndieVest Pictures had agreed to lend $1.608 million for the motion picture's production; however, no documents memorialized that purported loan and IndieVest Pictures never deposited or caused to be deposited, any funds into the escrow account. Notwithstanding, escrow broke on July 6, 2010, two days before the scheduled commencement of the film's production commencement. On that day, the cash balance in the escrow account was $2,875,000.00, over $1.6 million less than the specified mini in the First Amendment.
The Pawns of Badassdom?
The Offer of Settlement alleges that Bradley knew that IndieVest Pictures had not deposited any funds into the escrow account; and the escrow account held far less than $4.5 million when escrow broke and funds were disbursed to KOB 1 and to IndieVest Securities. It is further alleged that through IndieVest Securities, Bradley continued to offer and sell KOB1 units after the July 6, 2010 escrow break -- between July 7, 2010 and September 27,2010, seven subscribers invested an additional $300,000.0
By the September 27, 2010 scheduled termination of the offering in the absence of satisfying the mini, funds amounting to only $3,175,000 had been deposited into the Deutsche Bank escrow account. Notwithstanding, through IndieVest Securities, Bradley allegedly continued to solicit the sales of KOB1 units -- from November 2, 2010 through June 4, 2012, at least 15 subscribers invested an additional $800,000.00 and KOB1 had raised funds amounting to $3,975,000.00.
FINRA Pops The Question
During the third quarter of 2011, a FINRA examiner allegedly questioned Bradley about the ongoing KOB1 offering which, should have terminated no later than September 27, 2010. As a result of that inquiry, Bradley caused a document made as of August 18, 2011, and entitled First Amendment to Subscription Agreement and Second Modification of Private Placement Memorandum (''Second Amendment") to be sent to KOB1 investors. The Second Amendment purported to change the KOB1 expiration date to June 1, 2012 (unless extended by KOB1 for an additional 180 days (to December 1, 2012)). Notwithstanding the fact that the escrowed funds had already been disbursed - both to the issuer and to IndieVest Securities - the Second Amendment provided that if the mini remained unsatisfied by June 1, 2012 (or the optional 180 day extension date of December 1,2012), KOB1 would not accept any subscriptions and would return investor funds. Although at least one KOB1 investor objected to and did not sign the Second Amendment, Bradley never caused IndieVest to refund or offer to refund that subscriber's investment.
For Want Of A Nail -- Or A Mini
In consideration of the above facts, the Offer of Settlement alleges as a:
First Cause of Action that acting through IndieVest Securities, Bradley willfully violated Exchange Act Section 10(b), and Rule 10b-9 thereunder and thereby violated FINRA Rule 2010 because he:
- facilitated the release of escrowed funds even though the mini had not been raised;
- continued to offer and sell KOB1 units even though he knew, or was reckless in not knowing, that escrowed funds had been released when the mini had not been raised; and
- offered and sold KOB1 units after the termination date set forth in offering documents, thereby rendering the representations in the KOB1 PPM false and misleading.
Second Cause of Action that Bradley violated NASD Rule 3010 and FINRA Rule 2010 because in his role as IndieVest Securities' President and Chief Compliance Officer, he was responsible for enforcing its Written Supervisory Procedures including compliance with Exchange Act Rule 10b-9. As such, Bradley failed to:
- ensure that the offering was terminated when the mini had not been met;
- provide customers with the ability to receive a refund when permission to extend the offering was sought;
- ensure that customer funds remained in escrow until the contingencies were met or the offering was terminated; and
- ensure that investor monies were returned when the KOB1 offering failed to meet its contingencies prior to the termination date set forth in offering documents.
The Axe Falls
In accordance with the terms of the Offer of Settlement, FINRA imposed upon Bradley a $7,500 fine and a one-month suspension from association with any FINRA member in any capacity.
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