FINRA AWC Has Potential Precariously Perched Atop Conjecture and Speculation

April 24, 2020

Among the more asinine allegations in a recent FINRA AWC is that a financial professional needed to tell another financial professional that there are "challenges" in entering into a deal involving the cannabis industry. Worse, the investment advisor allegedly in need of such a disclosure never personally invested or arranged for any investment. We got potential resting on possibility precariously perched atop conjecture and speculation. 

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, Paul David Weiss, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Paul David Weiss, Respondent (FINRA AWC 201805853701)

The AWC asserts that Weiss entered the securities industry in 1989, was not registered from June 2014 until April 2017, and, thereafter, he was registered with FINRA member firm Mora WM Securities, Inc. (n/k/a Boreal Capital Securities LLC.) until May 2018. The AWC asserts that Weiss "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization."

2017: The Property

The AWC alleges that in May 2017:

[W]eiss became a principal in a limited liability company with another registered representative associated with the Firm ("RR A"), and two other individuals, in order to market and raise funds for the purchase of an industrial warehouse to lease to an independent operator of a medical marijuana cultivation facility (the "Property"). Weiss also engaged in efforts to raise funds for the purchase of the Property, without disclosing to the Firm that he was engaging in those activities.

Okay, so, you know, here we go again . . . another FINRA Conduct Rule 3270: Outside Business Activities of Registered Persons case. For more details on this recurring regulatory theme:

Rule 3270 Prior Written Notice

Rule 3270 requires in part that: 

No registered person may be an employee, independent contractor, sole proprietor, officer, director or partner of another person . . . unless he or she has provided prior written notice to the member, in such form as specified by the member. 

You may think that's pretty straightforward. Let's see how straight it actually is. To paraphrase Rule 3270, a registered person must provide his/her member firm with prior written notice before becoming:

an employee, independent contractor, sole proprietor, officer, director or partner of another person 

At first blush, the above presents itself as simple and fairly straightforward, right? Okay, now let's test that assumption; If a registered person becomes a "Principal" of a limited liability company, does that LLC role trigger the prior notice requirements of Rule 3270?

Technically, LLCs have "members." In an of itself, an LLC Principal is not necessarily:

an "employee" 

an "independent contractor" 

a "sole proprietor" 

a "partner

a "director" 

Having checked off virtually all the triggering roles coverred under FINRA Rule 3270, that leaves us with the issue of whether an LLC Principal is an "officer,"  Before you answer that question, remember that most registered reps are not lawyers. If those reps set up or joined an LLC, they likely hired a lawyer to counsel them and handle the mechanics. What the lawyer may have informed the client is that they were technically a "member" of an LLC, and, perhaps, depending upon the nature of their investment or the operating agreement among members, a "Principal." 

So . . . if you were told that you were a member and/or Principal of your LLC, does that also render you an "officer?"   And does it matter in which state the LLC was formed? 

Wattsamatta? Cat got your tongue? How come, all of a sudden, you ain't so sure about whether Rule 3270 applies to an LLC's Principal? And before you accuse me of loading the issue, let me cite FINRA's own words of description and characterization from the AWC [Ed: highlighting added]:

In May 2017, without notifying his Firm, Weiss became a principal in a limited liability company with another registered representative associated with the Firm ("RR A"), and two other individuals . . .

A Mattter of Principal(s)

The AWC asserts that "Weiss became a principal . . . with another registered representative . . . and two other individuals." Does that mean that the other rep (RR A) was also a Principal in the LLC, or that only Weiss was a Principal and RR A merely engaged in some undefined role at the LLC? Similarly, when the AWC says that Weiss became a Principal in the LLC, what does the errant "and" mean in the context of "two other individuals?" Were those two other individuals also Principals of the LLC "with" Weiss and RR A, or were those two other individuals involved in some other unstated role? 

May 2017: Efforts to Raise Funds

Additionally, the AWC asserts that Weiss engaged in "efforts to raise funds for the purchase of the Property, without disclosing to the Firm that he was engaging in those activities." Ummm . . . did Weiss merely make an effort to raise funds or did he raise any funds in May 2017? Typically, there is a period of "preparation" before engaging in an outside business activity, and, thereafter, there are acts that constitute engaging in an outside activity. If I telephone a landlord and inquire about an annual rent, that's not the same as signing the lease, tendering the security deposit, and paying the first and last month's rent. Preparation, negotiation, and going to contract are frequently three very distinct stages in most business ventures. 

March 2018: Arranging for a Loan

Arriving at March 2018, it appears that Weiss' 2017 efforts to raise funds came to zilch because here we are, some ten months down the road, and the AWC tells us that Weiss is still arranging for a loan in order to purchase the Property.  Pointedly,  the AWC asserts that it was only in March 2018 that Weiss and RR A finally arranged for an $870,125 loan "from a fund in which three Firm customers were invested." A fund? Seriously, that's the best Wall Street's self-regulator can offer to us? Like what kind of fund, and since FINRA brought up the whole fund thing, why does it even matter whether 1, 2, 3, or a gazillion Firm customers "were invested" in that fund? 

$119,000 in Obtained Funds

The AWC asserts that after raising the $870,125 loan from "the fund," and after the LLC purchased the Property, "Weiss obtained $119,000 in connection with the purchase." What the hell does that $119,000 constitute? Did Weiss bring in an additional $119,000 investment to the LLC after he had raised the $870,125 loan?  What does the AWC mean when it alleges that Weiss "obtained" that sum?

An Indirect Owner

FINRA's AWC wordsmiths concluded that: "Weiss remained an indirect owner of the entity that purchased the Property." Based upon previous allegations in the AWC, I thought that the LLC had purchased the Property. As such, what's the point about raising Weiss' "indirect" ownership? 

Weiss was a Principal of the LLC that was raising funds to buy the Property. In addition to his member role in the LLC, the AWC seems to assert that RR A and two other individuals were also LLC members. Aren't all four of the "members" cited in the AWC indirect owners of the Property? The LLC supposedly bought the Property. What's the big deal with Weiss, an LLC Principal, being an indirect owner -- isn't that a "duh?"

Ownership Interest

After the LLC secured the six-figure loan from the fund, its seems that the LLC went ahead and purchased the Property. At this point, the AWC now alleges that:

While the Firm was notified that the fund was providing the loan and that Firm customers were investors in the fund, Weiss did not disclose that he would have any type of ownership interest in the Property or that Weiss would receive the above-mentioned fee. 

Weiss did not notify the Firm of these outside business activities, even though he received the Firm's Annual Certification for 2018, which asked registered representatives to identify all of their outside business activities.

I must be missing something here. The AWC says that the Firm was, in fact, notified the the "fund" loaned money; however, oddly, the AWC doesn't say who notified the Firm about the loan and whether the purpose of the loan was disclosed. Then there's the mystery about who notified the Firm that some of its customers were investors in the "fund" that made the "loan."  If you add up those inferences and implications, FINRA seems to concede that the Firm knew about the loan to the LLC, knew that the loan came from some fund, and knew that Firm customers were invested in that fund.

That's a lot of knowing, right? So what the hell else did the Firm need to know? I'd like to know who notified the firm about all of that. If it was Weiss, then why is FINRA in such a lather?  If it wasn't Weiss, then why doesn't the AWC simply state as much?  

Fee. Fie. Fo. Dumb

The AWC assets that Weiss did not disclose that he would "receive the above-mentioned fee." 

Ummm . . . y'all wanna go back and read every word of the AWC before this "fee" allegation? 

What above-mentioned fee is the AWC talking about? I don't even see the word "fee" used in the AWC before the allegation about the so-called "above-mentioned fee." 

If the cited "fee" references Weiss having "obtained $119,000 in connection with the purchase," then the AWC should have termed that six-figure payment as a "fee" rather than leave it out there in a sea of contradictory inferences. When I first read the AWC, I thought that Weiss had managed to separately raise, on his own, an additional $119,000 in capital above the $870,124 loan from the fund. Frankly, I'm still not sure whether that $119,000 was a capital raise of a fee paid to Weiss.

As I finish reading the AWC's assertions and allegations about Weiss purported outside business activities, I'm still uncertain as to whether the funds at issue were ever invested into the Property. Did the Property get used by the medical marijuana business? Did any investor lose money or complain? Was there a lawsuit about the non-payment of the loan or compliance with its terms?  If a tree falls in the forest but everyone is home practicing social distancing, does anyone care about the fallen tree? 

Facilitatin' and Processin' 

In bringing up the regulatory rear, the AWC alleges that during the relevant period from about April 2017 to May 2018

[A]t a Firm customer's request, Weiss also facilitated and processed payments for a nursing home that the Firm's customer owned. For this activity, Weiss received monthly compensation totaling approximately $14,664 or $1,222 per month. 

Weiss did not provide any notice of this activity to his member firm at any time, even though he received the Firm's Annual Certification for 2018, which asked registered representatives to identify all of their outside business activities. 

Yeah, sure, I, ummm . . .  what? 

A customer asked Weiss to facilitate and process payments for a nursing home. And if you had to actually explain that allegation to a sentient human being using English words, you would say what exactly? 

What is involved in facilitating nursing home payments

What is different from said facilitating and processing those same payments? 

To make my point easier to comprehend, you work at a candy store. I come in and give you $1 towards the purchase of a candy bar. You take that dollar from my hand. Thereafter, you enter the price of the candy bar into the cash register, you put my dollar bill into the opened drawer, you make change, you place said change into my hand, and after I pocket the candy bar, I walk out of your store.

What aspects of the candy bar transaction constitutes the facilitating of my payment? What constitutes the processing of my payment? How do you parse those two terms among the acts of my tendering my dollar bill to you and your finalizing the purchase?  Setting the whole epic candy store transaction aside, go back and read the AWC and tell me:

How many payments were made to the nursing home? 

How large were the payments? 

How many hours did Weiss expend on facilitating and processing said payment? 

Did the customer complain about Weiss' work or his monthly compensation?  

None of which is to suggest that the facilitation and processing did (or didn't) rise to the level of a disclosable outside business activity. It seems like FINRA may be justified in charging the violations noted. Regardless, the AWC should not just rush through the underlying facts and offer a meaningless conclusory charge. 

January 2018 Email

Finally, the AWC found that Weiss had violated FINRA Rules 2210 and 2010 based upon allegations that:

In January 2018, Weiss sent an email to an investment advisor, in an effort to have the investment advisor invest or raise funds to purchase the Property. 

Weiss's email did not provide a fair and balanced discussion of potential risks arising from the potential investment. For example, the email did not state that real estate investments were illiquid and subject to market risk. In addition, it did not discuss risks associated with the cannabis industry, including: (1) the challenges cannabis companies may face in obtaining funding from banks; (2) the fact that while Weiss anticipated that a medical marijuana business sanctioned under state and/or local law would lease the Property, growing, possessing and selling cannabis is illegal under federal laws; and (3) other potential regulatory risks that might impact successfully leasing the Property to a medical marijuana-related business.

The email also contained unwarranted and/or promissory claims, including the claim that the investment lacked the risks generally inherent in the cannabis industry and that California's recreational marijuana laws would "ensur[e] the continued viability of the tenant's business and the underlying value of the real estate." Further, Weiss claimed that investors would receive a particular level of distributions on a monthly basis after the sixth month of the investment. However, according to the offering memorandum that Weiss attached to the email, distributions would only be made from available cash flow. Weiss's email also contained a projection of the amount of profit participation investors could expect to earn and the total cash return to investors, in violation of FINRA Rule 2210(d)(1)(F).

The investment advisor who received Weiss's email did not invest himself or obtain any other investments for the purchase of the Property. 

Omigod!  Say it isn't so!! Weiss sent an email to an investment advisor!!! What an outrage. 

The AWC expresses FINRA's regulatory high dudgeon because the email's purpose appears to have been to "have the investment advisor invest or raise funds to purchase the Property." Except -- hold on -- earlier, the AWC said that the LLC bought the Property in March 2018, so, why are we moving backwards in time to a January 2018 email? Notably, the investment advisor, who was solicited in January 2018, didn't personally invest and didn't raise funds. Anyone for a case of no-harm-no-foul?

Despite the failure of the email to accomplish its alleged goal, FINRA is also tacking on charges against Weiss for not explaining to the investment advisor that the contemplated real estate investments were illiquid. And what about this contemplated real estate investment? Is FINRA suggesting that a registered representative needs to explain to an investment advisor that investing in realty can be both illiquid and risky? Isn't that something that requires the due diligence of a potential buyer?

Imagine that you're an automotive engineer and I bring you to a used car lot, point to a $12,000 used car that I would like to buy, and then, rather than "say" anything to you, I send you an email asking if you would personally lend me $12,000 to buy the used car. Is it likely that I really need to tell you that I don't actually own the car that I'm asking you to lend me money to buy? Do I need to set out in the email that once I drive that $12,000 clunker off the lot that it will likely be worth less than what I paid for? Finally, do I need to disclose that there is always the risk that someone could drive into the car and damage it?

Among the more asinine allegations in the AWC was that a financial professional needed to tell another financial professional that there are "challenges" in entering into any deal involving the cannabis industry. And before you come to FINRA's defense, keep in mind that the investment advisor referenced in the AWC never invested or arranged for any investment, and that the Property was not yet purchased by the LLC during said discussions. Finally, y'all notice that the Property was acquired after a loan was made from the fund -- there was no "investment." We got potential resting on possibility precariously perched atop conjecture and speculation


In accordance with the terms of the AWC, FINRA imposed upon Weiss a $20,000 fine and a 10-month suspension from association with any FINRA member firm in any capacity.

As I often note and will do so here yet again, I NEVER criticize any respondent for entering into a regulatory settlement because I don't know what I don't know. Further, an AWC is a final version of a series of negotiations, and in its final form, any AWC may have jettisoned a lot of damaging allegations or assertions pursuant to the terms of the final settlement. Hopefully Weiss is content. Me . . . I'm as dyspeptic at the end of this blog as I was when I started drafting it.

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