Selling away is one of the oldest tricks used by dirty stockbrokers and financial advisers. In the typical selling away scenario, the broker solicits a customer to purchase securities not held or offered by his or her employer. These activities almost always violate securities regulations and FINRA exchange rules.
Because brokerage firms are generally responsible for the actions of their registered representatives and advisers, these companies can be on the hook if a customer loses money. It doesn’t matter much that the employer didn’t even know these activities were taking place.
Customers are often hurt because they think the brokerage firm has approved the investment. If the customer thought the brokerage firm that employed the broker was behind the investment or had vetted the investment, the customer may have a claim against the firm as well as the broker.
Sunbelt Securities Broker Charged with Selling Away
On December 6th, the SEC settled charges against former Houston based investment adviser James C. Tao with fraud. The agency said Tao and his partner Donna Boyd created a private equity fund called Presidio Venture Capital (PVC). Not only was Tao’s new fund not registered with the SEC, his own employer didn’t even know anything about it.
Records from the SEC’s Investment Adviser database shows that Tao worked for Merrill Lynch in 2011 and 2012. He then went to Sunbelt Securities where he remained until the selling away charges came to light. He has not been working in a licensed capacity since March 2016.
Sunbelt Securities says they canned Tao on March 3, 2016 for “failure to provide prior written notification and receive approval for outside business activities and private securities transactions”. They also say the unauthorized activities involved direct placements and LP interests.
The Financial Industry Regulatory Authority (FINRA) suspended him in June of 2016 after learning of the violations from Sunbelt. In August, he was permanently barred from the industry after FINRA says he failed to cooperate in their investigation.
SEC Charges Tao with Selling Away, Other Securities Violations
On December 5th, 2017, the SEC filed charges against Tao in a Houston federal court. The say that “without the Registered Firm’s [Sunbelt Securities] knowledge or approval, Defendants [Tao and his partner Donna Boyd] raised approximately $860,000 offering and selling membership units in Presidio Venture Capital to their advisory clients and brokerage customers [Sunbelt] and to other family, friends, and contacts.”
It wasn’t just the selling away that landed Tao in hot water. The feds say that he made “material misrepresentations and omissions” to his clients. Specifically, they say that he would hold their money until a minimum of $2.5 million was raised. He also didn’t tell investors that he was going to be investing their money in companies he owned, an obvious conflict of interest.
According to the complaint, investors were told that PVC “touted a 12% historical rate of return.” The SEC says that statement was false.
Rates of return are very important for would be investors. Although almost any prospectus will caution investors that past performance is not a guarantee of future results, it is an important factor to many investors. More importantly, brokers can’t simply invent phony numbers to make the investment look promising.
The SEC also says that Tao failed to register the fund he was selling. Why? We think it was to better conceal his activities from Sunbelt.
Presidio Venture Capital (PVC) a Ponzi Scheme?
Although Boyd and Tao have just been charged, those charges are quite serious. * According to the complaint, PVC has all the earmarks of a Ponzi scheme. That means new money coming in wasn’t always going to the fund’s stated investment objectives. The SEC says that sometimes it went into their pockets while at other times it went into businesses controlled by Tao.
*An SEC press release issued the same day as the complaint suggests that Tao has agreed to settle the charges. The details of the settlement are not yet public.
Sunrise is a small brokerage firm and Tao and Boyd operated their own two person branch office. If it is already difficult for brokerage firms to police selling away activities, it is especially so if the entire branch (the two defendants) are in on the scheme.
While the SEC went after Tao and Boyd, aggrieved customers can file claims against Sunrise. Despite the difficulty in policing rogue brokers, that responsibility belongs to the employer and not the customer.
A review of Sunrise’s broker recruitment propaganda indicates that Sunrise offers brokers the “ability to do their own branding” and provides them with “access to alternative, non-correlated investments.” In our opinion, Sunrise shouldn’t be surprised that it hired two rogue brokers.
Sunrise Securities Could Be on the Hook for Investor Losses
As noted above, broker dealers and investment advisory firms are liable and responsible for the actions of their representatives. SEC and FINRA rules say they have a duty to supervise all agents. For that reason, brokerage firms require brokers to disclose all outside business interests and send all correspondence on the employer’s letterhead and keep copies.
The SEC says that in this case, the $860,000 was raised from 25 investors over a three year period. 14 of those investors were existing clients of Sunrise Securities. Whether or not they were clients, however, may not matter if those investors thought they were dealing with Sunrise.
Are You the Victim of Selling Away?
We recently prosecuted many cases involving investments in a Ponzi scheme called PIWM. In many instances, these investments were being touted by brokers without the knowledge of their employer. In other words, the brokers were selling away.
Sometimes brokerage firms turn a blind eye to these activities, particularly if the broker engaged in the activity is a top producer.
Red Flags and Warning Signs of Selling Away Stockbroker Fraud:
- Your adviser uses the brokerage firm’s letterhead but with a different email to make it appear that the investment or product is sanctioned by the brokerage firm. Brokers know that most firms’ compliance departments careful scrutinize outgoing and incoming emails. A separate email allows the broker to hide his activities from the employer;
- The investment has an unusually successful rate or return or history of never having posted a loss;
- You don’t see the investment on your statement.
- You are instructed to make your check payable to a third party.
- Your broker becomes evasive when you ask questions.
There are exceptions to each of the above warning signs. If in doubt, every brokerage firm has a compliance department or compliance officer. It is okay to call for clarification. If your broker tells you not to or gets upset, consider that yet another red flag!
If you believe you are the victim of selling away, contact us immediately. Sometimes brokerage firms know or suspect that their brokers are selling away. Because these brokers are top producers, instead of taking action they will instead send you a “comfort letter” asking you to confirm that you are happy with your account. Don’t sign it!
Claims handled nationwide and on a contingent fee basis. You do not owe us any money unless we win.
MahanyLaw – America’s Stockbroker Fraud Lawyers