FINRA Warns Stockbrokers To Kick The Tires On Private Placements Deals

February 10, 2012

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA") and without admitting or denying the findings, prior to a regulatory hearing and without an adjudication of any issue, George Baseluos submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of George Baseluos, Respondent (AWC 2008011743302, February 3, 2012).  According to the AWC, Baseluos had no prior disciplinary history.


Baseluos was registered from July 2007 through June 2009 with FINRA member firm Fordham Financial.  From April 2008 through October 2008, Baseluos recommended private placement interests in Six Diamond Resorts International ("SDRI") to Fordham Financial customers.

The AWC asserts that SDRIs original Private Placement Memorandum ("PPM"), dated April 10, 2007 ("April 2007 PPM"), states that funds derived from that private placement were to be used for acquiring property in Central America and developing the land into resorts and retirement homes.

About a year after the issuance of the April 2007 PPM, SDRI disclosed in a March 2008 SEC filing that it had incurred a net loss in excess of $4.6 million for the year 2007.

By August 2008, SDRI still had not broken ground on any construction projects and was seeking additional financing through a "Bridge Loan" offering, which would include promissory notes payable in April 2009 that offered 8% interest. In the PPM for this Bridge Loan, SDRI claimed to be attempting to raise additional capital for the development of its Panamanian properties and for such expenses as "outstanding back salaries and outstanding loans owed to employees."

Customer AG

The AWC alleges that Baseluos solicited a customer, (identified as "AG" in the AWC) to invest in SDRI.  As part of his alleged effort to assure AG (who had only been a customer of Baseluos' since March 2008) as to the investment's safety, Baseluos supposedly said that it was safe enough for even his own grandmother.  Further, Baseluos allegely told AG that the investment was a "short-term bond deal" having no risk whatsoever.  Customer AG has not received repayment of his $50,000 SDRI investment.

FINRA's Concerns

In reviewing the SDRI solicitations and sale by Baseluos, FINRA was troubled by assurances of safety and apparent misrepresentation as to the nature of the investment.  In categorizing the stockbroker's apparent conduct, FINRA noted that he had failed to disclose that SDRI had:

  • not generated any profits,
  • not repaid debts,
  • not even broken ground on any of its planned construction projects, and
  • sought to raise capital just in order to meet everyday expenses.

Due Diligence

The AWC asserted that Baseluos's SDRI recommendation and safety assurances were based solely upon information he had received from his superiors at Fordham Financial; and, further, that Baseluos personally failed to corroborate those representations.  According to the AWC, that lack of personal due diligence constituted a failure by Baseluos to ascertain the true status of the company and the investment.  Pointedly, FINRA notes that other Fordham Financial registered representatives visited SDRI  in Panama in late summer/early autumn of 2007 and described what they saw as a "raw plot of land."  Notwithstanding such characterizations, Baseluos failed to confirm the representations that had been made to him about the company's alleged progress.

A Bridge Too Far

Also, the AWC alleges that  Baseluos negligently represented to AG that the Bridge Loan promissory notes would pay 8% interest in a matter of months, notwithstanding that SDRI hadn't been able to pay previous investors and the company was seeking to raise capital for everyday expenses.


FINRA charged that Baseluos' negligent misrepresentations to customer AG constituted violations of NASD Rule 2110, which requires members, in the conduct of their business, to observe high standards of commercial honor and just and equitable principles of trade. In accordance with the terms of the AWC, FINRA imposed the following sanction:

  • $25,000 Fine;
  • $50,000 Restitution to AG;
  • Suspension for 12 months from associating with any FINRA registrant in any capacity; and;
  • An undertaking to cooperate with FINRA Department of Enforcement staff in its prosecution of any other disciplinary action related to these events by, among other things, meeting with and being interviewed by the Department of Enforcement without the need of staff to resort to FINRA Rule 8210, and testifying truthfully at any related hearing that may take place.

Bill Singer's Comment

A compelling FINRA disciplinary case that sets forth the allegations with clarity, presents the rationale for sanctions, and imposes remedial measures that fairly address the specific misconduct.

For too long, the solicitation and sales of private placements has been, at best a murky area - and Wall Street's regulators certainly contributed to the build up of this cesspool through lax oversight and compromised regulation.  It was no secret on the Street that private placements had become a lucrative business for many brokerage firms and their registered persons.  Moreover, it was no secret that efforts at stricter regulation over the years were rebuffed or watered down so as to not jeopardize this golden goose.  Belatedly or otherwise, the securities industry's regulators have certainly honed in on this area of abuse and are now taking more effective steps to investigate and charge violations.

The warning to individual registered persons is that the days of your sleepwalking through these private placement deals is over. Where once your defense was "hey, that's what they told me," that will no longer cut it - as this case clearly shows.  If you're going to push a private placement you better do your own due diligence and retain all documentation of what you looked at and why you drew whatever favorable conclusions that you did.

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