When the BrokeAndBroker.com Blog's publisher, Bill Singer, read today's featured FINRA regulatory settlement, he wasn't a happy camper. The underlying facts didn't seem to warrant FINRA's imposition of a fine and suspension -- particularly since the respondent was essentially an industry rookie. And then Bill re-read FINRA's AWC. And then he did some research. And then he followed down a few leads. And then Bill did a 180 degree turn, which isn't an easy spin for him because he has two artificial hips. Regardless of the degree of difficulty, Bill did a complete reversal of direction and came around to accept FINRA's sanctions. After Bill was done changing course and agreeing with FINRA, he couldn't stop thinking about greek yogurt. On top of that, Bill couldn't stop humming Marvin Gaye's catchy tune "Mercy Mercy Me (the Ecology);" and being that Bill's in a generous mood today, he embedded into today's blog a video of a live performance of the tune by Marvin Gaye.
Case In Point
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, Kenny Danny Mezher submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Kenny Danny Mezher, Respondent (AWC 2017053887501, July 27, 2018)
The AWC asserts that Mezher was first registered in 2016 with FINRA member firm Growth Capital
Services. The AWC asserts that Mezher "has no prior disciplinary history."
The Volatility Fund
The AWC asserts that during the relevant period between January 2017 and March 2017, Mezher was associated with Growth Capital Services and was also employed by a
now-defunct hedge fund called Crescent Ridge Capital Partners. At the alleged direction and under the supervision of Crescent Ridge's owner,
Mezher purportedly raised capital for the fund by selling four limited partnership interests valued at $179,500 in CRVF, which the AWC characterizes as a "volatility fund. Said sales were made to five investors, all of whom were Mezher's
family members or friends.
The AWC concedes that Mezher did not receive selling compensation for his
participation in these four transactions.
Prior to selling these interests in CRVF, Mezher did not provide GCS with written
notice of these transactions or seek GCS' approval to participate in these
transactions. The AWC asserts that on October 23, 2017, the owner of Crescent Ridge was sentenced to ten years in prison after pleading guilty to wire fraud in connection with the sale of limited partnership interests in the Crescent Ridge funds.
FINRA deemed Mezher's conduct to constitute violations of FINRA Rule 3280: Private Securities Transactions of an Associated Person and Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Mezher a $5,000 fine and a two-month suspension from association with any FINRA member firm
in any capacity.
Bill Singer's Comment
When I first read this AWC, I thought it was ridiculous: You got a rookie stockbroker, who was registered for about a year or less when all this private securities transaction ("PST") crap took place. I mean, you know, maybe Mezher was just too new to the industry and didn't quite get the whole PST thing. Trust me, there are lots of folks out there who think they understand FINRA's PST Rule but they really don't. At first blush when I read about Respondent Mezher's case, I could only focus on the facts that he was first registered in 2016, the cited sales to the five investors took place in early 2017, and all the investors were either family or friends. I mean, c'mon give the guy a break. $5,000 is a big fine for such an out-of-the-gate mistake, and to tag Mezher with two-months in the penalty box seemed over doing the regulatory sanctions thing.
Then I did a little more reading. After which, I became a lot less sympathetic to Mezher. Not saying that the fine and suspension are fair but I am giving more weight to the fact that he negotiated the regulatory settlement and he signed off on it, and, if it's okay with him then it's more okay with me.
As it turns out, FINRA BrokerCheck records as of August 8, 2018, disclose under the heading "Customer Dispute - Closed-No Action/Withdrawn/Dismissed/Denied" that on December 12, 2017, apparently one of Mezher's friends or family members filed a FINRA arbitration against Growth Capital seeking $50,000 in damages and alleging:
Approximately January 2017, Representative allegedly conducted an unauthorized private securities transaction resulting in theft of claimant's investment.
On May 30, 2018, the customer withdrew the claim with prejudice. Maybe I should only give so much credit to the whole friends and family thing and the one-year-or-less registration status? On top of that, wow, Mezher's friend/family client apparently accused him of "theft." That's a pretty strong word to use, and all the more by a friend or family member.
Further, in Former Hedge Fund Manager Sentenced for $9.5 Million Investment Fraud (DOJ Press Release / October 23, 2017) https://www.justice.gov/usao-edva/pr/former-hedge-fund-manager-sentenced-95-million-investment-fraud, the DOJ press release states that Tamer Moumen defrauded over 45 clients between 2012 and 2017, when he falsely told investors that he was a successful trader who consistently beat the S&P 500 and was overseeing tens of millions of dollars through his company, Crescent Ridge Capital Partners -- in fact, he had no experience managing a hedge fund, had a history of losing money in the securities market, and was relying on investor money to support his lifestyle and pay personal expenses. Moumen purportedly lost or spent all investment funds within weeks or months of his receipt but concealed that result through the subterfuge of false statements showing investors steadily growing assets. Moumen was sentenced in the United States District Court for the Eastern District of Virginia to 10 years in prison for wire fraud and ordered to forfeit $9.5 million and pay $7.5 million in restitution to his victims.
That Moumen fellow seems like one hell of a piece of work. Made we wonder what, if any, due diligence Mezher did before putting his friends and family into the CRVF fund. At some point you sort of play all your cards and your left empty-handed. I thought FINRA could have shown a bit more mercy towards Mezher. By the time I arrived to the point where I am now, I wasn't so sure that Mezher was entitled to any mercy. As Shakespeare so famously wrote in "The Merchant of Venice" Act IV, Scene I:
The quality of mercy is not strained;
It droppeth as the gentle rain from heaven
Upon the place beneath. It is twice blest;
It blesseth him that gives and him that takes:
Lovely sentiment by the Bard. Fine words. Except . . . let's not kid ourselves. These days, "mercy" is so regularly strained by the courts and regulators that it has become the Greek Yogurt of Justice. Some folks think we need more compassion in our lives. Others think we've gone overboard. For all my first-blush anger and outrage over Mezher's fine and suspension, the more I investigated, the less angry and the less outraged I became. Eventually, I saw FINRA's point. The self-regulatory-organization probably got this one right. Initially, I may have been a bit too forgiving.
Unstrained or strained mercy aside, Moumen screwed 45 hard-working folks out of millions of dollars. Unwitting or witting, unexperienced or experienced, Mezher seems to have facilitated some of Moumen's fraud to the extent of the sales of four limited partnership interests valued at $179,500 to five friends/family investors. At least one of Mezher's investors seemed in a rage about the deception involved in the transaction. Hopefully, Mezher has learned a painful and valuable lesson; if not, hopefully, others will take advantage of this compliance and regulatory lesson.