New York Securities Lawyer Blog
On May 14, 2015, the Department of Enforcement for the Financial Industry Regulatory Authority (“FINRA”) filed a complaint (the “Complaint”) against ARI Financial Services, Inc. (“CRD No. 137608) (“ARI”) and William Brian Candler (CRD No. 2802438) (“Candler”). The FINRA Complaint alleged that ARI failed to establish and maintain a supervisory system reasonably designed to ensure that delegated supervisory responsibilities were properly exercised by employees of private placement issuers employed as independent contractors of ARI. Additionally, Candler, as the person responsible for establishing and maintaining ARI’s written supervisory policies and procedures, also failed to conduct reasonable due diligence regarding a private placement that ARI sold to its retail investors, which ultimately turned out to be a Ponzi-scheme. A complete copy of the FINRA complaint may be found here.
Established in 2005, ARI is a wholesaler of private placements that it markets to retail broker-dealers, who in turn, sell these investments to retail investors. Candler is the sole, full-time registered employee of ARI. However, FINRA alleges that ARI recommended and sold interests in a real estate based private placement called the Bridgeport Oaks Fund directly to retail investors through a separate branch office staffed by independent contractors who were also employed by the issuer of the Bridgeport Oaks Fund. The FINRA Complaint alleged that ARI marketed the Bridgeport Oaks Fund private placements without properly conducting its due diligence. In fact, what third-party due diligence ARI and Candler had on file should have raised red flags about the Bridgeport Oaks Fund private placement. However, neither Candler nor ARI followed up or investigated the Bridgeport Oaks Fund private placements further.
Furthermore, in 2009 the Illinois Securities Department issued a Temporary Order of Prohibition against the Bridgeport Oaks Fund, prohibiting them from selling securities in the state because of previous unlawful sales practices. This should have been a red flag for Candler and ARI requiring further investigation and inquiry, but neither took any action. Nonetheless, from 2009 through 2010, ARI through Bridgeport Oaks Fund personnel employed as issuer representatives at ARI sold over $500,000 of private placements in the Bridgeport Oaks Fund to retail investors.
In 2011, the U.S. Attorney for the Northern District of Illinois charged the owners of the Bridgeport Oaks Fund with operating an over $18 million Ponzi-scheme. The owners of the Bridgeport Oaks fund subsequently pled guilty to federal mail and wire fraud charges and were sentenced to prison terms.
FINRA Rule 2010 requires that “[a] member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” FINRA alleged that ARI and Candler violated FINRA Rule 2010 by failing to establish, maintain and enforce written procedures to supervise ARI’s wholesale private placement business. Specifically, FINRA alleged that ARI and Candler violated Rule 2010 by failing to: establish proper escrow accounts; maintain and review electronic mail; appropriately use a medallion signature guarantee stamp; review, approve and retain communications with the public made by issuer representatives employed as independent contractors at ARI; perform adequate due diligence and suitability analysis for the private placements it marketed; and prevent the dissemination of misleading communications to the public. In the FINRA Complaint, FINRA sought sanctions against ARI and Candler pursuant to Rule 8310 and 8330.