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Dallas Seller’s Club, Part 1: The “Gray Area” in Unregistered Brokerage Activity

Post on: October 31, 2017 | Abby Johansen | 0


This is the first installment in a series of posts about SEC enforcement action against Retirement Surety, LLC, Crescendo Financial, LLC, and three associated unregistered brokers based out of Dallas Texas. Read Part 2: When is a Note a Security? and Part 3: Punishment for Unregistered Brokerage Activity.

One of the most important requirements when selling notes is determining whether or not they are securities, and therefore fall under securities broker registration requirements. Unregistered brokers of securities can face severe SEC penalties. But the line between a normal note and a security is not always clear, which is why it is all the more important to find a definitive answer before selling the note.

An ongoing case from this summer demonstrates that the SEC continues to crack down on the unregistered selling of securities. This case is unique because the brokers were not knowingly attempting to defraud investors, as is the situation in most of the cases we’ve reviewed on broker registration and similar requirements for investment advisors. Instead, the unregistered individuals in question, Thomas Rose, David Leeman, and David Featherstone, licensed insurance agents based out of Dallas, TX, were unaware that what they had been selling were securities. The SEC alleged that the unregistered individuals were involved in the selling of securities to the tune of nearly $12.5 million in the form of Verto Capital Management, LLC* notes.[1]

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In an interview with Law360, Thomas Rose stated that he and the other partners were told by Verto and their attorneys that Verto’s short term, nine-month, notes were not securities.[2] He expressed that Verto’s attorneys believed there was “a lot of gray area” regarding the legal treatment of the notes at issue, but that their disclosure language provided sufficient protection against having to register the notes as securities.[3] Rose emphasized that, “we were totally under the impression that these were not securities.” He continued, “we’re not securities-licensed, we would have never sold them.”[4]

Nonetheless, on July 6, 2017 the SEC independently brought an enforcement action against the three men as well as Retirement Surety, LLC and Crescendo Financial, LLC, companies with which the three men partnered for the sale of the notes.

Throughout a two-year time period, Rose, Leeman, and Featherstone sold approximately 162 Verto Notes directly to nearly 82 individual investors and received commission, from Verto, for each individual Note sold.[5] In total, Rose, Leeman, and Featherstone earned $684,250 in commissions.[6]

The unregistered individuals solicited the Verto notes through telephone calls, meetings, and mailing to their targeted potential investors. They provided investors with offering materials regarding the Verto Notes explaining Verto’s business, trading strategy, ability to complete scheduled payments on the Notes, and the “low risks” of investing.

In his interview, Rose explained that the SEC has not provided information supporting their claim that the notes qualified as securities, despite their requests.[7]

It should be mentioned that Verto had previously been brought up on charges by the SEC for a “Ponzi-like” scheme involving the sale of the promissory notes,[8] in which the SEC accused Verto and its CEO of using money from new investors to repay earlier investors as well as other misrepresentation and fraud charges.[9] Verto settled the case for over $4 million without admitting or denying any of the charges. The current charges are independent of this previous case.

In a follow-up to this post, we will discuss the analysis on whether these notes, or notes like them, are securities. Bottom line, even good faith belief that an instrument is not a security is not generally a viable defense to the SEC bringing an enforcement action.

As SEC enforcement of unregistered brokerage activity continues to ramp up, it is important to carefully consider one’s financial product, the plan to sell it, the advisors, partners, and their advice before a capital raise in order to avoid major legal trouble.


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[1] Retirement Surety, LLC, Crescendo Financial, LLC, Thomas Rose, David Leeman, and David Featherstone, Securities Act Release No. 10386, Exchange Act Release No. 81087, Investment Company Act Release No. 32728, File No. 3-18061, 2017 WL (July 6, 2017).
[2] Joh Hill, SEC Goes After 2 Texas Firms, 3 Employees Over Note Sales, Law360 (July 7, 2017).
[3] Id.
[4] Id.
[5] Supra note 1
[6] Id.
[7] Hill, supra note 2
[8] Firm, CEO Settle Charges in Ponzi-Like Scheme Involving Life Insurance, Release No. 2017-93 (May 4, 2017).
[9] Id.

Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice.

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Abby Johansen

Abby is a part of the legal team at WealthForge where she manages state business licensing compliance and handles tasks ranging from corporate governance to compiling management team minutes. Abby is currently a law student at the University of Richmond, where she is a member of the Journal of Law and Technology and serves as Vice President for the Student Intellectual Property Association.
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