FINRA has fined a New York-based broker/dealer $30,000 for failing to catch a rep’s outside business activities with a medical cannabis company he co-owned, according to the regulator.
Park Avenue Securities missed numerous “red flags” that one of its reps was helping to run the business, according to a settlement with the firm and the regulator. The rep even participated in undisclosed securities transactions involving a securities offering by the company.
Park Avenue Securities is the b/d arm of The Guardian Life Insurance Company of America and has been FINRA-registered since 1999, with approximately 2,400 reps spread across 400 branches. As of late last year, the firm had nearly $10 billion in managed assets, according to the firm’s Form ADV.
But FINRA alleged that starting in December 2014 and for the next several years, the firm failed to supervise the registered rep (who is not named in the settlement) who was helping run a business in violation of FINRA rules.
The rep in question helped manage and operate the cannabis company and received an ownership stake as a reward for helping set up the business. The rep received company mail at his Park Avenue Securities office, met with insurance agents regarding the business, assisted its CEO with corporate planning issues and worked on its acquisition by another firm, according to FINRA.
Additionally, the rep participated in undisclosed private securities transactions on a company offering, and even solicited Park Avenue customers to invest in the company without ever notifying the b/d, according to FINRA.
As part of its procedures, the firm filtered company emails for “red flags” that could suggest outside business activities; if one was found, the email could be cited for a review. Between late 2014 and April 2018, the Park Avenue system flagged 26 emails from the rep related to the cannabis business, according to the settlement.
But in 25 instances, the initial reviewer of the emails closed the inquiry without investigating or escalating them to a supervisor. The emails included inquiries from investors in the business, solicitation to potential investors (that include Park Avenue clients), as well as other communications about the cannabis company’s operations, according to FINRA.
“Several of the emails included attachments further implicating the representative’s outside business activity or private securities transactions … such as subscription agreements, business licensure applications and acquisition documents,” the settlement read.
Reviewers only escalated one flagged email, and in February 2016, a supervisor asked the rep about the marijuana business, but he denied any knowledge of it. The supervisor closed the inquiry and didn’t probe further, despite the fact the system flagged eight further emails suggesting the rep’s involvement with an outside business, FINRA alleged.
In 2019, the firm finally found evidence of the securities transactions, later stating in a May 2020 Form U5 that the rep was allowed to resign “while under investigation for failure to disclose an unapproved private securities transaction and soliciting clients to invest in same” (FINRA later barred the rep for not providing information in response to a request).
Representatives from Park Avenue Securities did not return requests for comment by publication.
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