Stockbroker Slips Off Plymouth Rock Movie Studio Deal

September 22, 2016

In today's Blog, publisher Bill Singer, Esq. makes it clear that FINRA got its man dead to rights. FINRA's Private Securities Transaction Rule requires prior written notice, and that notice did not seem to have been sent. Ding goes the self-regulator's cash register. FINRA's Outside Business Activity Rule requires prior written notice, and that notice did not seem to have been sent. Again, ding goes the self-regulator's cash register. If we go by the facts set forth in the regulatory settlement, the respondent violated both rules. The discomfort arises when we examine the fact pattern and then compare the misconduct to the fine and suspension.

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, Russell Leo Sadler submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Russell Leo Sadler, Respondent (AWC 2014039725301, September 7, 2016).

In 1995, Sadler first became registered and eventually registered with FINRA member firm LPL Financial LLC, where he remained until 2013. The AWC asserts that Sadler had no prior disciplinary history with the Securities and Exchange Commission, any self-regulatory organization or any state securities regulator.

SIDE BAR: Not fully set forth in the AWC but disclosed on FINRA's online BrokerCheck, Sadler was registered with LPL in July 2001.

PST Violation

The AWC asserts that:

While associated with LPL, Sadler engaged in private securities transactions without providing prior written notice to LPL. In 2008, Sadler invested at least $200,000 in the securities of PRS, a company which had proposed to build a movie studio in Plymouth, Massachusetts. That same year, Sadler participated in several of his LPL customers' investments in PRS securities. Sadler collected and gave approximately $249,000 of investors' money to PRS. Ultimately, PRS failed and investors lost all of their principal.

FINRA deemed Sadler above conduct as constituting a violation of NASD Conduct Rules 3040 and 2110 (for conduct before December 15, 2008) and FINRA Rule 2010 (for conduct on and after December 15, 2008).

OBA Violation

Additionally, the AWC asserts that:

Sadler engaged in outside business activities without providing prior written notice to LPL. In particular, in 2010, Sadler formed two Massachusetts companies, ERS and MI. From 2010 through 2013, Sadler was the sole officer or managing member of these companies.

FINRA deemed Sadler's above conduct as constituting a violation of FINRA Rules 3270 and 2010

In accordance with the terms of the AWC, FINRA imposed upon Sadler a $25,000 fine and a 12-month suspension from associating with any FINRA member firm in any and all capacities.

Bill Singer's Comment

Up front, let me share with you my initial reaction to this case. A movie studio in Plymouth, Massachusetts?  The place where the Pilgrims stepped foot when they got off the Mayflower? A movie studio in Plymouth? Plymouth? The Pilgrim's place? The whole Plymouth Rock thing? Plymouth? Seriously? Hollywood East in Plymouth? Plymouth? 

Landing of the Pilgrims, Plymouth Rock, 1620 - Free Pictures at Historical Stock

If we go by the letter of FINRA's Private Securities Transactions ("PST") Rule, I grudgingly concede the point. The PST Rule requires prior written notice to the employer firm, and it does not appear that Sadler notified LPL of his PRS investment. Beyond acknowledging the letter of FINRA's law, however, much of the PST charge comes off a bit ticky-tacky -- and if there is, in fact, more meat on the PST bone, then the AWC should have provided more content and context.

For example, the AWC asserts that in 2008, Sadler invested $200,000 (presumably his own money) into PRS. Okay, fine, FINRA dinged him for not providing prior written notice of that PST. On the other hand, there is no indication in the AWC that the funds involved were provided by customers or third-parties: The funds appear to have been Sadler's. Moreover, we are told that in 2008, "Sadler participated in several of his LPL customers' investments in PRS securities. Sadler collected and gave approximately $249,000 of investors' money to PRS."

SIDE BAR: Ummm. . . hello all of my dear friends at FINRA, how are you?, okay? great, listen, do me a favor, don't use words like "participated" when explaining the underlying facts in an AWC.  What the hell do you mean when you say that Sadler "participated" in several PRS investments with his customers? 

If all that "participated" meant was that he "collected" the investors's funds and transmitted same to PRS, that doesn't sound like participation to me; what it sounds like is acting as a go-fer or delivery person. If some yutz from UPS or FedEx had picked up various packages containing the investors's checks and delivered them to PRS, I don't think we would assert that the courier had "participated" in the investment, would we? And if I have misinterpreted your characterization of Sadler's participation, that's on you and not me. 

In the future, say what you mean and make sure that you provide sufficient content and context. Oh, and one other thing, since your PST Rule makes such a big deal about whether a registered rep receives any form of compensation in a PST, don't you think that you should have clarified what I am inferring; namely, that Sadler didn't get any compensation?

Then there's the OBA charge. Lemme see if I got this right. You actually charged Sadler with an OBA violation solely because "in 2010, Sadler formed two Massachusetts companies, ERS and MI. From 2010 through 2013, Sadler was the sole officer or managing member of these companies."

SIDE BAR: As with Sadler's PST violation, I'm going to give you the OBA misconduct because the FINRA OBA Rule is fairly direct in requiring anyone serving as a officer or proprietor of a business to provide the member firm with prior written notice. On the other hand, beyond forming ERS and MI, did Sadler engage in any business whatsoever through those companies . . . did he realize any compensation from those two entities? Not saying he did. Not saying he didn't. On the other hand, the AWC ain't saying all that much either.

At the end of the day, Sadler gets whacked with a hefty $25,000 fine and a 12-month suspension. I'm trying to add up what he purportedly did wrong and figure out how FINRA came up with those sanctions? Seems to me that if I go by what's set forth in the AWC (which is pretty much what I am constrained by), this respondent invested his own money in a failed deal, collected checks from investors and delivered them to the company in which those investors sought to invest, and he incorporated two companies. That's $25,000 of misconduct? That's 12 months of suspension? You're right, sure, let's toss into that calculus the fact that Sadler failed to provide to his member firm prior written notice of his cited activity.  Sure as hell sounds like this chicken got plucked.

In closing, let me note what I usually do with comments of this type about an AWC. Respondent Sadler was represented by legal counsel. Sadler chose to sign off on this regulatory settlement with FINRA. There are likely many aspects of the underlying events that were left on the cutting floor: possibly as the result of superb lawyering and possibly as a concession by FINRA. What is set forth in the AWC may be a pale resemblance of far worse facts -- or not. Ultimately, however, if the fine and suspension were acceptable to Sadler, who the hell am I to question his decision to settle. My complaint here remains an old one: FINRA AWCs too frequently lack sufficient content and context to make the settlement intelligible.

For some sense of the background of the Plymouth Rock Studios project:

The current FINRA rules governing PSTs and OBAs:

FINRA Rule 3280: Private Securities Transactions of an Associated Person

(a) Applicability

No person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.

(b) Written Notice

Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.

(c) Transactions for Compensation

(1) In the case of a transaction in which an associated person has received or may receive selling compensation, a member which has received notice pursuant to paragraph (b) shall advise the associated person in writing stating whether the member:

(A) approves the person's participation in the proposed transaction; or

(B) disapproves the person's participation in the proposed transaction.

(2) If the member approves a person's participation in a transaction pursuant to paragraph (c)(1), the transaction shall be recorded on the books and records of the member and the member shall supervise the person's participation in the transaction as if the transaction were executed on behalf of the member.

(3) If the member disapproves a person's participation pursuant to paragraph (c)(1), the person shall not participate in the transaction in any manner, directly or indirectly.

(d) Transactions Not for Compensation

In the case of a transaction or a series of related transactions in which an associated person has not and will not receive any selling compensation, a member which has received notice pursuant to paragraph (b) shall provide the associated person prompt written acknowledgment of said notice and may, at its discretion, require the person to adhere to specified conditions in connection with his participation in the transaction.

(e) Definitions

For purposes of this Rule, the following terms shall have the stated meanings:

(1) "Private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of NASD Rule 3050, transactions among immediate family members (as defined in FINRA Rule 5130), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded.

(2) "Selling compensation" shall mean any compensation paid directly or indirectly from whatever source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.

FINRA Conduct Rule 3270: Outside Business Activities of Registered Persons

No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person, or be compensated, or have the reasonable expectation of compensation, from any other person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member, in such form as specified by the member. Passive investments and activities subject to the requirements of NASD Rule 3040 shall be exempted from this requirement.

*** Supplementary Material ***

01 Obligations of Member Receiving Notice. Upon receipt of a written notice under Rule 3270, a member shall consider whether the proposed activity will: (1) interfere with or otherwise compromise the registered person's responsibilities to the member and/or the member's customers or (2) be viewed by customers or the public as part of the member's business based upon, among other factors, the nature of the proposed activity and the manner in which it will be offered. Based on the member's review of such factors, the member must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including where circumstances warrant, prohibiting the activity. A member also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirements of NASD Rule 3040. A member must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1).
READ the Blog Analysis of FINRA's Current PST Rule