Broker-Dealer Litigation - Greenberg Traurig LLP

In re Torrey Pines Sec. Inc., Release Nos. 63835 & 3153, 2011 SEC LEXIS 391 (Feb. 3, 2011).
The Securities and Exchange Commission initiated administrative proceedings against a
broker-dealer. After an investigation, the SEC alleged that a registered representative and part
owner of the broker-dealer raised over $17 million from friends, family, and customers of the
broker-dealer in a private, unregistered offering of securities. In doing so, the representative
acted as an unregistered broker-dealer in violation of Section 15(a) of the Securities Exchange
Act of 1934, as he conducted the offering outside the scope of his employment with the brokerdealer.
The broker-dealer failed to establish reasonable policies and procedures to assign
responsibility for supervising the representative. No one reviewed the registered representative’s
daily correspondence or telephone calls, other than in cursory annual audits. The broker-dealer
delegated the daily responsibilities of the office to the registered representative. If the registered
representative had not been left to supervise himself, his outside sales activities likely would
have been detected. Although the broker-dealer had a policy prohibiting selling securities
outside the firm, and a policy for registered representatives to report outside business activities,
the firm failed to develop systems for supervisors and the compliance department to monitor
adherence to these policies. A number of suspicious events concerning the representative’s
outside business activities came to the attention of supervisors and compliance staff, but the
broker-dealer did not have procedures and systems in place requiring them to follow up on these
events. The SEC ordered that a public hearing be convened before an administrative law judge
at a time and place to be fixed.
In re Clifton, Release Nos. 9188 & 63926, 2011 SEC LEXIS 644 (Feb. 17, 2011).
The Securities and Exchange Commission instituted public administrative and cease and
desist proceedings against the principal and president of a registered broker-dealer. The brokerdealer,
on behalf of an oil and gas exploration business, offered limited partnership interests in
an oil and gas drilling project. The project encountered numerous problems, including excessive
amounts of water in some of the wells, which ultimately caused the company to shut down the
entire project. The company timely informed the broker-dealer’s president of these
developments. The president, however, failed to ensure that all the broker-dealer’s registered
representatives were informed of these developments. As a result, investors were not adequately
informed about the project before investing. In addition, the president failed to reasonably
supervise the broker-dealer’s registered representatives, who violated Section 17(a) of the
Securities Act by transmitting the misrepresentations in the sale and offer of the project. The
broker-dealer’s written supervisory procedures, which were drafted by the president, failed to
establish a formal correspondence review system to prevent and detect materially misleading
statements in the sales representatives’ outgoing correspondence to investors in connection with
the limited partnership interests. The procedures also failed to establish a mechanism to follow
up with investors after the sale to confirm that the investors had received adequate, updated
information about the project at the time of their investment. Finally, the president failed to
implement day-to-day supervision over the registered representatives. At a minimum, the
president failed to ensure that all representatives were informed about the status of the projects.
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