Legal

Felix Facebook Funds Fined $250,000 by FINRA

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FINRA settled an enforcement action with secondary market player Felix Investments, which did not deny allegations that it sold interests in private placements without registering the securities or determining whether they were appropriate for investors. The company and four brokers agreed to pay a $250,000 fine and make changes to their compliance procedures. Felix brokers “pitched their unregistered offerings to over 1,000 people, often through mass mailings of boiler-plate email, without first establishing a substantive relationship with each person solicited,” according to FINRA findings. One principal also employed cold calls to tout the risky investments, according to FINRA. The company also downplayed risks inherent in the investments and did not disclose facts relevant to the sales, FINRA alleged.

Legal

Facebook Fame Heralds Pre-IPO Share Frauds

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Publicity around transactions in private shares of hot pre-IPO companies like Facebook have transformed the secondary market for such shares from an obscure bazaar to a well known venue whose huge potential for rewards can also draw fraudsters. The Securities and Exchange Commission recently took action against two operations that allegedly used the lure of private share investments to fleece unwary investors. A spokesman for the commission would not comment on the specific situations but noted that theSECissued a pre-IPO scam alert in March and updated it on April 24. “SECstaff is aware of a number of complaints and inquiries about these types of frauds, which may be promoted on social media and internet sites, by telephone, email, in person, or by other means,” according to the alert. “In another matter in September 2010,” the alert says, “a judgment order was entered in favor of the SECbased on allegations that a scam artist had misappropriated more than $3.7 million from 45 investors in four states by offering fake pre-IPO shares of companies, including AOL/Time Warner, Inc., Google, Inc., and Rosetta Stone, Inc. before the companies went public.”

Nick Bhargava, CEO and co-founder of Motaavi, said in an email that “Facebook has made the pre-IPO private company markets highly visible.” (Motaavi was established to facilitate equity crowdfunding and provide a market for trading shares issued to crowdfunding investors once theSECfinishes regulations for this form of financing.)

“Before Facebook, the average person did not know that stock in such companies could trade hands many times before the IPO,” Bhargava said.

Legal

SEC Sanctions Attorneys over Bogus Opinions

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The Securities and Exchange Commission recently took action against three attorneys who allegedly wrote improper opinions in support of securities issuances. In three separate matters, the commission filed suit against Florida resident Cameron Linton, sanctioned Texas attorney and former SEC counsel Phillip Offill, Jr., for evading registration requirements, and found that Boca Raton, Fla.-based William Reilly violated a previous order banning him from practicing before theSEC. Legal opinions are required for the sale of restricted securities held by insiders or investors who otherwise purchased shares that cannot be sold immediately. Regulators are always on the lookout for mercenary attorneys willing to write opinions that allow illegal sales to take place and avoid regulatory scrutiny in order to manipulate prices. Offill was imprisoned after a jury concluded in early 2010 that he had played a role in a variety of pump and dump schemes, including several related to PIPE financings of reverse merger companies.

Legal

SEC Settles with Alternate Green CEO, Still Suing Belmont Partners

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A key defendant in a civil suit against defunct Alternative Green Technologies (AGTI) settled with the Securities and Exchange Commission last month, but the regulator is still pursuing a case against investment bank Belmont Partners for allegedly bungling a reverse merger. The commission entered a judgment against Alternative Green CEO Mitchell Segal, permanently banning Segal from offering or trading in penny stocks. Financial reparations will be determined later. In December of last year, the commission accused Roslyn, N.Y. attorney Segal and Belmont Partners principal Joseph Meuse of reverse merger improprieties that allegedly occurred in 2008 and 2009. Belmontfiled court papers refuting theSEC’s claims, including an April motion and asking to have the case dismissed.