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Dallas Sellers Club, Part 3: Punishment for Unregistered Brokerage Activity

Post on: February 6, 2018 | Abby Johansen | 0

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This is the third 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 1: The "Gray Area" in Unregistered Brokerage Activity and Part 2: When is a Note a Security?

On November 14, 2017, the SEC issued an order listing their official findings for the previously discussed Verto Note case and imposing sanctions against the players in their enforcement action against Retirement Surety LLC, Crescendo Financial, Thomas Rose, David Leeman, and David Featherstone.1 The SEC remained unconvinced that the short nine-month lifespan of the Verto notes disqualified them as securities, as the order affirmed their previous allegations that the respondents sold securities as unregistered brokers in unregistered transactions.

The order holds that respondents willfully violated Sections 5(a) and (c) of the Securities Act of 1933 Sections 5(a) and (c), as well as Section 15(a) of the Securities Exchange Act of 1934.2 According to the order, Sections 5(a) and (c) of the Securities Act bar the direct or indirect sale or offer for the sale of securities, unless a registration statement has been filed or is in effect. Additionally, Section 15(a) of the Exchange Act forbids brokers from using the mail, or any means of interstate commerce, “to effect any transactions in, or to induce or attempt to induce the purchase or sale of securities without first being registered as or associated with a registered broker dealer.3


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As punishment, each of the three unregistered brokers is required to cease and desist from committing any current or future violations set out in the order. Rose and Leeman are both suspended for a total of nine months, and Featherstone suspended for six months, from “being associated with a broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, or from participating in offering penny stock.” 4 Retirement Surety, LLC and Crescendo Financial LLC are to be legally dissolved as entities within 60 days of the order.

The order provides that additional proceedings shall be held to determine if any disgorgement, prejudgment interest, or civil penalties should be imposed upon Rose, Leeman, and Featherstone.

But, in accordance with the order, during any additional proceedings, Rose, Leeman, and Featherstone are barred from arguing that they did not violate any securities laws contained in the order or challenging the validity of the order. Also, during any such proceedings the relevant facts outlined in the order relating to their actions, as unregistered brokers who sold unregistered securities, are to be held true.

Following the order, on December 15, 2017, in an additional proceeding, an administrative law judge held a conference with respondents they stated that no new evidence or materials would be submitted in the case.5 Finally, on January 3, 2018, the judge ruled that any subsequent hearing in the matter was unnecessary as there was “no genuine issues of material fact” left to resolve,6 effectively ending the Verto note saga.

This case demonstrates that when dealing with notes that have a maturity below nine months, unless a viable argument can be made under the “family resemblance” test set forth in Reves v. Ernst & Young, the notes will be presumed to be securities.7 Here, the respondents submitted an offer of settlement and did not attempt to make a case under the family resemblance test and consented to the SEC’s November 14th order. Nonetheless, the lesson remains that it is essential to determine whether a note qualifies as a security prior to its sale in order to avoid SEC enforcement action and punishment. 

 

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[1] Retirement Surety LLC, Crescendo Financial LLC, Thomas Rose, David Leeman, and David Featherstone, Securities Act Release No. 10436, Securities Act Release No. 82069, Administrative File No. 3-18061, 2017 WL 5437486 (Nov. 14, 2017).
[2] Id.
[3] Id.
[4] Id.
[5] Retirement Surety LLC, Crescendo Financial LLC, Thomas Rose, David Leeman, and David Featherstone, Administrative Proceedings Rulings Release No. 5394, Administrative Proceeding File No. 3-18061 (Dec. 15, 2017).
[6] Retirement Surety LLC, Crescendo Financial LLC, Thomas Rose, David Leeman, and David Featherstone, Administrative Proceedings Rulings Release No. 5433, Administrative Proceeding File No. 3-18061 (Jan. 3, 2018).
[7] Reves v. Ernst & Young, 494 U.S. 56 (1990).

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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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