Finra fines Calif. broker-dealer $750K over sale of Reg D offerings

Living up to its recent promise to strengthen its oversight of Regulation D offerings, Finra today took a…

Living up to its recent promise to strengthen its oversight of Regulation D offerings, Finra today took a substantial whack at a broker-dealer over the sale of private placements.
Finra, the Financial Industry Regulatory Authority Inc., this morning said it fined Irvine, Calif.-Pacific Cornerstone Capital Inc. and its former chief executive, Terry Roussel, a total of $750,000 for making misleading statements and, in some cases, omitting facts in connection with the sale of two private placements.
Pacific Cornerstone sold the two deals, Cornerstone Industrial Properties LLC and CIP Leveraged Fund Advisors LLC, from January 2004 to May 2009, Finra said in a statement. Those two offerings were affiliated businesses of Pacific Cornerstone. According to Finra records, Mr. Roussel is the broker-dealer’s largest single shareholder.
Either directly or through other broker-dealers and advisers, about 950 accredited, wealthy investors poured close to $50 million into the two deals, Finra said. In its statement, Finra did not state how much, if any, of those clients’ money is missing.
Finra officials this month promised more legal action and fines against broker-dealers that sold private placements.
“We have a number of investigations under way involving allegations of wrongdoing arising from the sales of these Regulation D private placements,” James Shorris, executive vice president and executive director of enforcement at Finra, said in a Dec. 10 interview
with InvestmentNews.
Pacific Cornerstone has about 35 registered representatives, and its business focuses on selling private placements, said an industry source who asked not to be identified.
Finra said it found “no reasonable basis” for Pacific Cornerstone’s promises to return an investor’s principal in two to four years, along with generating a return of more than 18%.
Over the five-year period, Mr. Roussel told investors that all was well with the offerings, Finra said.
Mr. Roussel periodically sent letters to the private-placement investors to update them on the progress of their investment that painted a positive — but unrealistic — future, without providing required risk disclosures, Finra said. His letters also failed to disclose the complete financial picture of the two companies, it said.
Finra also charged Pacific Cornerstone and Mr. Roussel with advertising violations and failure to supervise.
The broker-dealer was fined $700,000 and agreed to correct its disclosure to investors and submit sales literature to Finra for one year. Mr. Roussel was fined $50,000, and was suspended from the securities business for 20 business days. He also can’t supervise brokers for three months.
As part of the settlement, the firm and Mr. Roussel neither admitted nor denied the charges.
Mr. Roussel told InvestmentNews that Finra never alleged securities fraud violations against the firm, nor did it suspend the firm or tell it to stop selling private placements. He added that Finra never alleged that the firm lost clients’ money, alleging instead that it “missed projections” on the returns it claimed it would generate.
According to Mr. Roussel, “We made projections that we weren’t able to be meet” on the investments, which he characterized as venture capital funds. “We decided to settle [with Finra] so we could now move forward.”