Unregistered Securities

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Jan 6, 2010 10:30 am

http://www.brokeandbroker.com/index.php

BrokeAndBroker.com
An irreverent Wall Street Blog

by Bill Singer

Blog Home | Past Entries

Unregistered
Securities: Unless and Unlawful

http://www.brokeandbroker.com/index.php?a=blog&id=286

Section 5 of the Securities Act of 1933 is as primordial a securities
law as there is.  It is truly one of the building blocks of our system
of securities regulation.  In somewhat ominous language, the section starts off by noting that unless a registration statement is in effect as to a security, it shall be unlawful to
sell said security. Whenever you see something that includes the words
"unless" and "unlawful," you sure as hell better be careful.  See the section reprinted in full below:


Section 5 -- Prohibitions Relating to Interstate
Commerce and the Mails 

a.     
Sale or delivery after sale of unregistered securities 

      Unless a
registration statement is in effect as to a security, it shall be unlawful for
any person, directly or indirectly-- 

        
1. to make use of any means or instruments of transportation or communication
in interstate commerce or of the mails to sell such security through the use or
medium of any prospectus or otherwise; or 

        
2. to carry or cause to be carried through the mails or in interstate commerce,
by any means or instruments of transportation, any such security for the
purpose of sale or for delivery after sale. 

b.     
Necessity of prospectus meeting requirements of section 10 

      It shall be
unlawful for any person, directly or indirectly-- 

        
1. to make use of any means or instruments of transportation or communication
in interstate commerce or of the mails to carry or transmit any prospectus
relating to any security with respect to which a registration statement has
been filed under this title, unless such prospectus meets the requirements of
section 10; or

        
2. to carry or cause to be carried through the mails or in interstate commerce
any such security for the purpose of sale or for delivery after sale, unless
accompanied or preceded by a prospectus that meets the requirements of
subsection (a) of section 10. 

c.      
Necessity of filing registration statement 

      It shall be
unlawful for any person, directly or indirectly, to make use of any means or
instruments of transportation or communication in interstate commerce or of the
mails to offer to sell or offer to buy through the use or medium of any
prospectus or otherwise any security, unless a registration statement has been
filed as to such security, or while the registration statement is the subject
of a refusal order or stop order or (prior to the effective date of the
registration statement) any public proceeding or examination under section
8. 

Reduced to basics, Section 5 requires all issuers to
register non-exempt securities with the Securities and Exchange Commission
(SEC).  The section further imposes the obligation to use a compliant
prospectus subject to a registration statement to effectuate such sales.

Notwithstanding this longstanding law, many still run afoul
of it – unintentionally, inadvertently or otherwise.  It is often the case
with relatively short and simple rules that they become subject to
interpretation – too much of which occurs around the office water cooler. 
Commonsense is not always the best way to read what has been cobbled together
by legislators.  It’s the damn nuance of these things that will kill
you.  Beg and plead all you want with the highway cop about not seeing the
sign, but I’ll bet that while you’re rambling on he is writing out the ticket. 
As Wall Street struggles to return to health and as businesses seek to tap into
whatever capital is still available, it is likely that we will be reading more
and more about unregistered securities transactions.

In recent months, http://RRBDlaw.com
has been reporting about increased regulatory actions involving unregistered
securities. See:

http://www.rrbdlaw.com/enforcement-actions/tags.php?term=Unregistered
Securities 

In the Matter of Peter
Herbert Hackstedde and Ross William Sindelar (FINRA OS/2006004707201/December
2009), Hackstedde and Sindelar acquired unregistered and non-exempt shares from
an issuer with a view to distribution and, therefore were statutory
underwriters. They distributed, or caused the distribution of, unregistered and
non-exempt securities to the public.

Pursuant to an Offer of Settlement, the Financial Industry
Regulatory Authority (FINRA) fined Hackstedde $301,896.93 ((includes
$286,896.93 disgorgement of profits) and suspended him for thirty business
days.  Sindelar was fined $418,904.91 (includes $$403,904.91 disgorgement
of profits) and suspended thirty business days.

In IIn the Matter
of Patrick Francis Harte Jr. (FINRA 2006003672401/December 2009), Harte
failed to
supervise registered representatives who engaged in the sale of
unregistered securities, and failed to
take adequate measures to ensure that the registered
representatives and employees he supervised complied with the requirements of
Section 5 of the Securities Act.

FINRA imposed a $10,000 fine upon Harte and suspended him in
Principal capacities only for six month.  He was further ordered to
requalify as a Principal before functioning in that capacity.

In the
Matter of Alan Frank Pacella (FINRA 2007009934702/November 2009), before
entering sales orders, Pacella relied on his member firm’s compliance
department to review whether the shares were freely tradable. The compliance
department conducted its tradability review in the ordinary course of business
and incorrectly approved the securities for public resale, even though the
shares were restricted. FINRA took the position that Pacella had or should have
had the company’s Articles of Incorporation and press release, thereby allowing
him to determine that the securities were not registered for public sale and
not subject to an exemption.

Pursuant to a settlement, FINRA imposed a censure upon
Pacella and fined him $10,000.

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Jan 7, 2010 2:10 pm

"In the Matter of Alan Frank Pacella (FINRA 2007009934702/November 2009), before entering sales orders, Pacella relied on his member firm’s compliance department to review whether the shares were freely tradable. The compliance department conducted its tradability review in the ordinary course of business and incorrectly approved the securities for public resale, even though the shares were restricted. FINRA took the position that Pacella had or should have had the company’s Articles of Incorporation and press release, thereby allowing him to determine that the securities were not registered for public sale and not subject to an exemption. <?: PREFIX = O />



Pursuant to a settlement, FINRA imposed a censure upon Pacella and fined him $10,000."




OK, so, you ask compliance to confirm that something is ok to do, something that is not a normal everyday occurance in your business, and it turns out compliance was wrong and YOU pay the fine?  WTF?  Just goes to show you, under most all circumstances the rep is wrong unless proven otherwise....

Jan 7, 2010 9:13 pm

Your posts can get a little tough to read, it seems like they are being reformatted from some other site and the flow gets washed. It can be tough to see what link to click on and if it is a link that relates to the story or another page. There also seems to be quite a bit of content that does not correctly convert on this site- just an FYI....

Jan 8, 2010 8:28 am

To play devil's advocate with you guys - compliance didn't sell the securities, the rep did.  Both parties made the wrong call in doing this unusual business but the rep sold them.



I understand that this is a WTF moment though.  And I'm sure from an "office politics" standpoint, the FA could make a case with the firm for a little "assistance" on the fine.
 
More than likely the FA also contacted the wrong compliance department - although if this were the case, then the compliance person should have referred them to the experts.  I probably would have worked my way through 4 different departments before getting an answer I trusted (but hindsight being 20/20 I would most likely not thought of this as a big deal).