Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm World Equity Group, Inc. (World Equity) alleging that between 2009 through 2012, the firm failed to implement an adequate supervisory system reasonably designed to detect and prevent potential rule violations including: (1) failure to preserve emails; (2) failure to establish and maintain account records and obtain suitability information; (3) failure to implement a supervisory system to ensure suitability of transactions in non-traditional ETFs; (4) failure to properly document adequate due diligence in connection with private placements and non-traded REITs; (5) failure to establish an adequate supervisory system for the review of activity for options activity in unapproved accounts; (6) failure to have a reasonable supervisory system to ensure compliance with Section 5 of the Securities Act of 1933; and (7) failure to adequately enforce information barrier procedures.
World Equity is a full service broker dealer and has been a FINRA member since 1992. The firm is based in Illinois and has approximately 160 brokers operating out of 68 registered branch offices.
One of the offerings FINRA investigated at World Equity was Newport Digital Technologies, Inc. (NDT). In 2008, according to FINRA, World Equity hired a new syndicate manager by the initials MN to lead the business line out of the firm’s Spokane office. During MN’s tenure as syndicate manager, World Equity was involved in several private offerings including the NDT offering for which the firm acted as the placement agent. NDT had been registered with the SEC since 2000 and originally was known as Golden Choice Foods Corporation and then as International Food Products Group, Inc. (IFPG). These companies were in the consumer food business until December 2008.
In December 2008, IFPG decided to discontinue in the food industry and transform itself into a technology company. In January 2009, FINRA found that MN introduced IFPG to WEG who established an investment committee that included World Equity employees, MN, and IFPG insiders. Thereafter, FINRA alleged that MN was conducted due diligence on NDT. By July 28, 2009, World Equity and NDT had begun negotiating the draft private placement agreement that the firm approved in December 2009.
FINRA found that World Equity had placed NDT on its “watch list” on August 5, 2009, and on its “restricted list” by October 28, 2009. FINRA alleged that World Equity’s involvement as placement agent was not made public until the firm filed a Form D with the SEC on January 8, 2010. However, FINRA found that from late January 2009, through June 2009, firm employees and/or their family members purchased 1,021,000 shares of IFPG/NDT stock at an average price of $.04/share. In addition, FINRA alleged that from June 2009, through November 2010, 359,926,535 restricted shares of NDT valued at $11,877,575 were deposited into various firm accounts, including accounts belonging to World Equity’s senior executives, employees, representatives and their friends and families, many of whom had multiple accounts with the firm.
On August 9, 2012, NDT announced that it was leaving the technology business and returning to the specialty food industry. Thereafter, NDT’s registration with the SEC was revoked in June 2014. FINRA found that World Equity terminated MN and closed the Spokane office in December 2011.
FINRA found that, among other violations, these transactions raised red flags of potentially questionable trading activity in NDT in employee and customer accounts during the period January 8, 2009, through December 9, 2010, both prior to and during World Equity’s involvement as placement agent on the NDT Offering. FINRA alleged that at least 47 World Equity employees or customers engaged in transactions in NDT that should have at least raised a red flag regarding whether they were in possession of material non-public information.
To be continued…
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