A FINRA hearing panel expelled Red River Securities, LLC from FINRA membership, and barred its CEO from associating with any FINRA member in any capacity. The sanctions stem from the panel’s findings that the firm and CEO (together, the “Defendants”) intentionally misrepresented and omitted material information regarding sales of joint venture interests that the panel found constituted “securities.” FINRA ordered the defendants to jointly and severally pay $24.6 million in restitution to investors.
In addition, the panel found that (i) the firm improperly approved two customers as suitable, who, in fact, were not suitable, to invest in the joint ventures, and (ii) the Defendants failed to maintain and enforce written supervisory procedures and an adequate supervisory system. The hearing panel dismissed, without discussion, allegations by the FINRA Enforcement Department made in July 2015 that the firm violated the general solicitation prohibition for the private placement of securities under Regulation D.
Lofchie Comment: From a legal standpoint, the most interesting aspect of the case was the holding that, under the “Howey analysis” (who remembers this “orange grove case” from law school?), the general partnership interests were “securities,” since the investors were expecting not to take part in the management of the business, but to rely on the efforts of the sponsors of the joint venture.