NYSE Regulation, Inc. announced today it has censured and fined J.J.B. Hilliard, W.L. Lyons, Inc. (“Hilliard Lyons”), a member firm, $1 million in connection with the sale of unregistered securities through a private placement that did not qualify for exemption under the federal securities laws.
The firm was also cited for using offering documents that contained material misrepresentations and/or omissions of facts, unsuitable sales to public investors, and supervisory, record-keeping and other violations.
NYSE Regulation also required Hilliard Lyons to make restitution to customers and to enter an undertaking to notify the NYSE of its supervisory systems and controls (that includes a CEO certification) in the event the firm re-enters the private placement business.
“When soliciting the public’s hard-earned dollars for private placements, firms must provide complete and accurate disclosure of the inherent risks,” said Susan L. Merrill, chief of enforcement, NYSE Regulation. “Harmed investors should be made whole when unregistered securities are sold to the public in violation of federal securities laws and NYSE Rules.” Click here to access the Hilliard Lyons Hearing Board Decision.
From July 2000 through March 2001, Hilliard Lyons engaged in the offer and sale of an unregistered security through a private placement offering to public investors using offering documents that contained material misrepresentations and/or omissions of material fact and failed to fully disclose the risks of the investment. This security was sold to investors for whom this investment was unsuitable.
In June 2000, Hilliard Lyons was retained as exclusive financial advisor to Company ABC (“ABC”), a non-public Delaware corporation that provided secure Internet application services. Between $2 and $5 million of capital was to be raised in a private placement offer and sale of convertible promissory notes (the “Notes”) to accredited investors. The Notes were to be converted to common stock upon the occurrence of certain future contingencies.
From July through December 2000, registered representatives offered and sold a total of $3,605,000 of the Notes to 52 individuals, at least eight of whom were unaccredited, without making the proper disclosures to qualify for a registration exemption or filing a registration statement. All customers lost their investments when ABC was liquidated in March 2001.
None of the offering documents provided to the investors disclosed the fact that their investment was a bridge loan (a speculative short-term investment made in anticipation of intermediate- or long-term financing) or the risks inherent in such an investment. Several customers were not provided complete offering documents. Some of the offering documents inaccurately described the Notes as “common stock.”
The Notes were sold to at least nine customers for whom the investment was unsuitable based upon their investment objectives, experience and/or financial circumstances. The investments represented a substantial portion of several customers’ net worth and liquid assets.
In addition, in order to meet the $250,000 minimum investment requirement, funds from 37 investors totaling $1,805,000 was pooled together in a corporate account opened at Hilliard Lyons by a former registered representative (“RR”) who acted on instructions from an employee of the firm’s investment banking department.
In contravention of Hilliard Lyons’ written conflict of interest policies and procedures the RR, who referred ABC to the firm, participated in the sale and solicitation of the Notes, including frequent interactions with ABC’s CEO who was a family member. The RR ultimately sold $1.98 million of the Notes to 22 investors and was the firm’s leading salesman on this offering. See Henry A. Meyer, Decision 06-214 (NYSE Hearing Board December 11, 2006 ) (former RR disciplined for sales of unregistered securities).
In addition, from September 2000 to March 2001, Hilliard Lyons offered and sold a total of $350,000 of another company’s convertible promissory notes to 11 investors in a second private placement for which the firm was unable to provide to NYSE Regulation’s Division of Enforcement basic and pertinent information regarding the offering.
Moreover, from October to December 2000, the firm offered and sold a third private placement security and, after significant terms of the offering were altered because the minimum subscription requirements were not met, failed to provide investors with appropriate notice of their right to elect a refund and improperly released funds from escrow. The investors in these offerings also lost their entire investments.
Hilliard Lyons shall make restitution in an amount not to exceed $3,575,108. The firm may subtract any litigation settlements, provided that each customer receives reimbursement equal to the total amount invested in the private placement offerings.
The firm also agreed to provide notice to the Division of Enforcement prior to re-entering the private placement business, including a statement at that time outlining all systems, controls, and policies and procedures to be employed for compliance with the federal securities laws and NYSE Rules, and a certification signed by firm’s CEO that the firm has implemented those measures.
This disciplinary action concerned NYSE rule violations arising from violations of Section 5 of the Securities Act of 1933, violations of Sections 10(b), 15(c) and 17(a) of the Securities Exchange Act of 1934 and Rules 10b-9, 10b-10, 15c2-4(b), 17a-3 and 17a-4 thereunder, and NYSE Rules 342, 351(a)(8), 440 and 476(a)(6).
In settling these charges brought by NYSE Regulation, J.J.B. Hilliard, W.L. Lyons, Inc. neither admitted nor denied guilt.
About NYSE Regulation
NYSE Regulation, Inc., is a not-for-profit corporation dedicated to strengthening market integrity and investor protection. It protects investors by regulating the activities of member organizations through the enforcement of marketplace rules and federal securities laws. NYSE Regulation, Inc. also ensures that companies listed on the NYSE and on NYSE Arca meet their financial and corporate governance listing standards. For more information, visit our Web site at www.nyseregulation.com.