Securities Headlines: Halcyon Cabot Partners is Expelled from Industry by FINRA, Blackstone Settles Disclosure Failure Charges for Nearly $39M, SEC Approves Proposal to Improve Transparency for OTC Equity Securities

FINRA Expels Halcyon Cabot, Bars Chief Executives
Halcyon Cabot Partners, Ltd. has been expelled by FINRA. The regulator also has barred its CEO Michael Morris and CCO Ronald Heineman from the securities industry. The reasons for the expulsion and bars include fraud, abusive sales practices, the concealment of private placement fee kickbacks, and other purported acts.

According to the self-regulatory organization, Halcyon, the two men, and previously barred former registered rep. Craig Josephberg hid the discount the issuer gave to a venture capital firm when it bought a private placement in a company. The scam was executed using a fake placement fee deal after the venture capital firm agreed to buy all the offerings. However, FINRA said, because there already was a buyer, Halcyon didn’t conduct any work and gave back nearly all of its $1.75M fee to the investor via bogus consulting agreements. As a result, the company was able to hide that its shares were sold at a reduced rate.

FINRA contends that Halcyon did not properly supervise Josephberg, who was making unauthorized trades and churning retail accounts. The regulator is accusing Morris of falsifying Halcyon’s records to hide the securities sales that Josephberg made in states where he wasn’t registered, including Texas.

Blackstone Group to Pay Almost $39M Over Disclosure Failures
The Securities and Exchange Commission said that three private equity fund advisers that belong to The Blackstone Group have consented to pay close to $39 million to resolve charges that they did not fully inform investors about the benefits they received from discounts on legal fees and accelerated monitoring fees. While Blackstone is settling and has consented to the entry of the regulator’s order stating that it breached its fiduciary duty, failed to put into place policies and procedures that were reasonably designed, and failed to correctly disclose information to investors of the funds, it is not denying or admitting to allegations.

The three fund advisers are:

• Blackstone Management Partners
• Blackstone Management Partners IV
• Blackstone Management Partners II

According to the regulator, the three fund advisers did not adequately disclose that the monitoring fees paid by portfolio companies that they owned were accelerated before the companies’ IPO or sale. The payments that Blackstone received lowered the portfolio companies’ value before they were sold, which hurt the funds and their investors.

The SEC said that Blackstone usually charges each fund-owned portfolio company a monitoring fee that pays for consulting and advisory services for about a decade. However, prior to the IPO or private sale of some of the companies, Blackstone purportedly ended monitoring agreements while accelerate future monitoring fee payments. While it disclosed that it could collect monitoring fees before investors committed capital, it did not reveal that it would accelerate monitoring fees until after it received them. Blackstone also is accused of not disclosing it had a legal fee arrangement that gave it a bigger discount than what the funds got.

As part of the settlement, the company will disgorge $26.2 million of ill-gotten gains, pay $2.6 million of prejudgment interest, as well as a civil penalty of $10 million. The money will go to investors that were impacted.

SEC Approves FINRA’s Proposal Related to OTC Equity Securities
The U.S. Securities and Exchange Commission has approved FINRA’s proposed rule enhance its transparency initiative related to over-the-counter equity securities. Per the new rule, the self-regulatory organization will supplement the alternative trading system it published with other equity volume that FINRA members have executed. This should allow investors and market participants to better comprehend the market share and trading volume of a firm.

FINRA has been trying to improve public visibility of off-exchange trading.

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FINRA Expels Halcyon Cabot Partners and Bars CEO and CCO for Fraud, Sales Practice Abuses, and Widespread Supervisory and AML Failures, FINRA, October 7, 2015

FINRA Allowed To Share Over-The-Counter Securities Data, Law360, October 8, 2015

Read the SEC Order in the Blackstone Case (PDF)