Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Merriman Capital, Inc. (Merriman) concerning allegations that for more than three years Merriman’s written supervisory procedures were not reasonably designed to achieve compliance the FINRA rules. FINRA alleged that Merriman’s written supervisory procedures failed to describe the specific procedures to be followed and the persons responsible for carrying them out. In addition, according to FINRA, between May 2009, and September 2013, Merriman Capital raised more than $16 million for its parent company through several private offerings of securities even though Merriman did not have written procedures related to the sale of private placements.
Merriman has been a FINRA member since November 1986 and its business is focused on offerings of growth companies and institutional investors. Merriman is headquartered in San Francisco, California and employs fifty-five registered persons.
FINRA alleged that Merriman Capital’s written supervisory procedures, at fifteen pages long, listed legal rules and regulations that had to be complied with but failed to describe the specific procedures to be followed by the firm or how compliance with the procedures would be documented. Further, FINRA found that until June 2011, Merriman written supervisory procedures failed to address private placements even though the selling private placements was a substantial portion of the firm’s business. FINRA found that Merriman failed to address private placements in the firm’s supervisory manual even though Merriman Capital raised more than $16 million for its parent company through several private offerings.
FINRA also alleged that the firm failed to maintain adequate procedures related to private placements even after it was put on notice of these failures. In June 2011, FINRA stated that it sent inquiries to the firm related to a private offering and the firm revised its written supervisory procedures to address private placements. However, FINRA found that the revised procedures were still insufficient because they failed to address what steps the firm would take to ensure compliance with its due diligence obligations, with FINRA Rule 5122, or with the applicable exemption from registration.
FINRA staff notified Merriman that the new procedures related to private placements appeared to be deficient. Nonetheless, FINRA found that the firm continued to engage in private placements of its parent company’s securities while maintaining the inadequate supervisory procedures. The August 2009, Merriman raised approximately $10 million by selling shares of preferred stock. According to FINRA, approximately fifty individual and institutional investors invested in the offering. FINRA found that Merriman did not file the offering materials with FINRA’s Corporate Finance Department.
FINRA also found that in April 2011, Merriman raised $3.1 million by selling shares of 3-year promissory notes that paid ten percent interest. FINRA found that twenty-four accredited investors purchased the notes but that two of the individual accredited investors did not have substantial experience in evaluating and investing in private placement transactions of securities in companies similar to Merriman Holdings.
According to FINRA the term sheet Merriman used for the April 2011 offering only disclosed to investors that the intended to use $750,000 and $1,000,000 of the proceeds to settle certain litigation against the Company. FINRA determined that the majority of the proceeds were intended to be used for various ordinary operating expenses and that only ten percent of the proceeds from the offering were used to resolve litigation when FINRA rules require that the business purpose use of the funds be the use of 85% of the proceeds.
Our securities attorneys handle claims concerning the sale and issuance of private placements and the failure of brokerage firms to supervise their employees. We welcome all inquiries.