You do "X" and, as it turns out, you really should not have. Ooops! Time to step up to the old Wall Street regulatory line and take your punishment. You own the problem. You screwed up. Now, you expect to be fairly charged, fairly fined, and fairly suspended. Sometimes you realize your expectations. Sometimes, however, a regulator sees you in its cross-hairs, figures that you're a sitting duck, and, wham, you get hit with multiple charges for the same misconduct. At times, one misstep sets off a cascade of violations: It's the domino effect.Case In PointFor 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, John Paul Corsi submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of John Paul Corsi, Respondent (AWC 2015046951301, January 3, 2017). Since 1991, Corsi has been registered with various FINRA member firms and by July 2004, he was registered with WRP Investments, Inc., which was acquired by Sterne Agee Financial Services, Inc. in 2014. The AWC asserts that Corsi had no prior relevant disciplinary history. OBA The AWC asserts that from the relevant November 2009 through August 2013, Corsi was employed as Manager of Sales and Customer Service with the judgment collection firm Argent of Nevada, and he had disclosed that outside business activity ("OBA") to WRP. Notwithstanding his OBA disclosure, Corsi allegedly failed to further disclose that he was engaged in fundraising for Argent, as he was purportedly required to do by his firm's written supervisory procedures. FINRA deemed Corsi's selective disclosure to constitute a violation of NASD Rule 3030 and FINRA Rule 2010 for his conduct on or after November 20,2009 and prior to December 15, 2010. He violated FINRA Rules 3270 and 2010 for his conduct on or after December 15, 2010. Promissory Note Sales During the same relevant time noted above, Corsi allegedly solicited at least 15 of his WRP customers to invest in Argent promissory notes; however, prior to recommending the notes as investments, Corsi had allegedly failed to notify WRP in writing of his conduct. During the relevant time, the AWC asserts that Corsi's WRP customers invested $1,790,041 in the Argent notes and that he was typically paid about a 5% fee. The AWC asserts that on three occasions between November 2011 and November 2013, Corsi affirmed to WRP that he was not participating in any private securities transactions ("PSTs"). The AWC notes that;
[T]he purpose of the Argent notes was to raise capital for Argent, and investors were attracted to invest in them based on the favorable rate of interest promised by Argent. Also, notes were being sold to numerous individual purchasers, and the purchasers, including WRP customers, reasonably considered they were making an investment when they purchased an Argent note
SIDE BAR: FINRA deemed the Argent promissory notes to be securities pursuant to the test enunciated in See Reves v. Ernst & Young, 494 U.S. 56, at 62-65 (1990), aff'd. 507 U.S. 170 (1993)
FINRA deemed Corsi's PST conduct above to constitute violations of FINRA Rules 3040 and 2010. Suitability Finally, the AWC asserts that as early as November 2009, Corsi had recommended Argent promissory notes to WRP customers; and with respect to three WRP customers:"We conclude, then, that in determining whether an instrument denominated a "note" is a "security," courts are to apply the version of the "family resemblance" test that we have articulated here: A note is presumed to be a "security," and that presumption may be rebutted only by a showing that the note bears a strong resemblance (in terms of the four factors we have identified) to one of the enumerated categories of instrument. If an instrument is not sufficiently similar to an item on the list, the decision whether another category should be added is to be made by examining the same factors."
[C]orsi recommended they each invest a significant portion of their overall stated net worth in the Argent notes. Corsi recommended that each of these customers invest at least 20% or greater of their stated net worth in the Argent notes. Each of these customers' investment objectives were (1) tax-deferred growth, and (2) capital appreciation. The Argent notes carried a significant amount o frisk as evidenced by the high rates of interest (10% to 18%), and did not meet the customers' investment objectives.
Violations of firm policies regarding outside business activities.FINRA Sanctions In accordance with the terms of the AWC, FINRA imposed upon Corsi a $20,00 fine and a 20-month suspension in all capacities from association with a FINRA member firm. Bill Singer's Comment The AWC asserts that Corsi complied with the prior written notice requirement of the OBA Rule but then asserts that his failure to disclose his "fundraising" activities violated the rule. If the fundraising activities were private securities transactions ("PSTs"), the OBA Rule specifically exempts "activities subject to the requirements of Rule 3280" from the OBA Rule's disclosure requirements. Since FINRA also charged Corsi for PST Rule violations for what appears to be the same cited fundraising activities, this aspect of the AWC seems akin to a double-dip. It is difficult to discern the difference between the conduct that gave rise to the OBA charge and also to the PST charge. It seems that Corsi likely violated either the OBA Rule or the PST Rule but the AWC fails to persuade me that he violated both per the same underlying conduct. As to the Suitability Rule charge, I got no problem with that one. Like I said in the introduction to this article, sometimes knocking over one domino sets of a click, clacking fall of many others. VISIT the BrokeAndBroker.com Blog OBA Cases Archive DOWNLOAD a PDF Copy of Bill Singer, Esq.'s OBA Rule Analysis Visit the BrokeAndBroker.com PST Cases Archive DOWNLOAD a PDF Copy of Bill Singer, Esq.'s PST Rule Analysis