Securities Arbitration Lawyer Blog
CFD Investments, Inc. (“CFD”) and FINRA entered into a Letter of Acceptance, Waiver, and Consent (“AWC”) over CFD’s failure to conduct reasonable due diligence into Payson Petroleum, Inc.’s private placement offerings and its failure to document the limited due diligence that it conducted. As part of the August 24, 2020 AWC, CFD was censured and suspended for 45 days from all private placement activities. CFD’s suspension is in effect through November 18, 2020. CFD also agreed to pay $750,000 in partial restitution to customers.
The AWC allegations involve CFD’s oil and gas private placement sales to retail customers. Specifically, that between March 2015 and February 2016, CFD recommended and sold interests in Payson to 31 of its retail customers who invested nearly $2.2 million. CFD did not conduct reasonable due diligence into the offerings prior to making its recommendations. When Payson went bankrupt in 2016, CFD’s 31 customers lost all or substantially all of their investments. CFD and its representatives received $198,100 in commissions from Payson for these sales.
The private placement offerings were approved through CFD’s Chief Compliance Officer Matthew Bahrenburg (CRD#: 5295661). Bahrenburg has served in the role since 2012 and has been registered with FINRA since 2007. FINRA suspended Bahrenburg from engaging in principal and supervisory activities through November 4, 2020. The investigation found that CFD, through Bahrenburg:
- Failed to reasonably assess Payson’s financial condition. For example, Bahrenburg failed to request additional financial information from Payson, or to verify Payson’s ability to make its promised capital contribution of between 10%-20% of the offering, or up to $6,650,000.
- Failed to reasonably investigate a 2012 investor lawsuit against Payson. Bahrenburg knew the lawsuit resulted in a $9 million jury verdict against Payson in July 2014.
- Failed to review Payson’s prior offerings despite CFD’s written procedures requiring such a review.
- Accepted Payson’s information and representations, and failed to conduct an independent review of the Payson project on which the private placement offerings were based.
FINRA also found that:
- Despite the requirements in CFD’s written procedures, Bahrenburg and CFD failed to conduct any ongoing due diligence.
- Bahrenburg failed to document his due diligence process of the Payson offerings.
- CFD failed to conduct reasonable due diligence into Payson and, as a result, failed to make a reasonable determination of the Payson offerings’ suitability for any class of investor. Accordingly, CFD had no reasonable basis to recommend the Payson offerings to retail customers, even accredited investors.
- CFD received additional compensation from Payson as a CFD “sponsor.” CFD’s failure to disclose the compensation was a material omission to investors in the Payson offerings, as it would have flagged a possible conflict of interest.
Traditionally, private capital market transactions were open to accredited investors who met certain income, net worth and financial sophistication. On August 26, 2020, the Securities and Exchange Commission (SEC) amended the accredited investor definition to expand access.
Under Regulation D of the Securities Act, issuers such as Payson can access the capital markets without registering securities if they meet certain exemptions from the registration requirements. Brokerage firms must establish and maintain a reasonably designed system to supervise associated persons and their activities to ensure compliance with securities laws and industry regulations. FINRA rules require broker-dealers to conduct a reasonable investigation of private placement investments before offering and recommending them to their customers. When a brokerage firm fails to adequately supervise associated persons, they may be liable for investment losses sustained by their customers.
A FINRA restitution order does not preclude investors from pursuing their own claims to seek restitution or other available remedies. Investors harmed by CFD’s actions may have a claim against the firm.
If you have lost money in oil and gas private placements with CFD Investments, Inc., contact New York securities arbitration lawyer Jorge Altamirano of Iorio Altamirano LLP at jorge@ia-law.com or toll-free at (855) 430-4010 for a free and confidential evaluation of your account.
Iorio Altamirano LLP is a securities arbitration law firm based in New York, NY. We pursue FINRA arbitration claims nationwide on behalf of investors to recover financial losses arising out of wrongful conduct by financial advisors and brokerage firms.