James W. Browne, Kevin Calandro, Exchange Act Rel. 58916, November 7, 2008
Time since appeal - 9 months 24 days
Time since last brief - 6 months 15 days
Pages - 16
Footnotes - 41
Browne and Calandro were registered representatives who were charged with engaging private securities transactions without giving prior notice to or obtaining permission from their firm. NASD suspended Browne for six months and fined him $25,000. Calandro was suspended for three months and fined $5,000. The Commission set aside the findings of violations and sanctions.
Browne and Calandro sought permission to purchase stock in a private placement. They consulted their manager who advised them to make a written request to their firm. When Browne became concerned the offering would close before the purchase was formally approved, his manager suggested that the purchase be made by Browne's wife in her name and advised that no permission would be required. In addition, Browne and Calandro told various friends, family, and customers about their purchases of the stock. Some of those persons also purchased in the private placement. Browne also was given permission from his firm to serve as a director of the company on condition that he not discuss the merits of the company with any clients of his firm. Browne and Colandro also bought stock in a later private placement offering of the company. Various friends and family of Browne's and Clandro also bought stock in this later offering after he discussed the offering with them. There was no evidence that Browne solicited or recommended the investment. Browned and Calandro were paid a finders fee in the form of shares of the company. They claimed they had not expected to be paid the finders fee. Browne claimed he understood the stock was in payment for his services as a director and Calandro argued it was in payment for his general efforts to assist the company. Neither informed their employer of the receipt of this free stock.
NASD found that Browne had "participated" in private securities purchases by nine investors and Colandro in purchases by five.
FINRA rule 3040 prohibits persons associated with member firms from participating in "any manner" in a private securities transaction without written notice to the firm and written permission if the person may receive any compensation. The Commission has long given the phase "participate in any manner" a very broad construction. The Commission construes "participation" to mean taking specific actions to effect a transaction or profiting from referring an investor's purchase after making a referral. Here, the Commission found that the evidence did not establish a nexus between Browne's and Calandro's conduct and the specific customer purchases. Several of the purchasers were referred to the company for purposes other than making an investment such as attempts by them to establish a business relationship with the company. The purchasers in the second offering were previous investors in the company who were solicited by the company to participate in that offering. FINRA's theory of liability was that Browne and Colandro should have known that start up companies often seek investments from business vendors and that by referring people to the company for business purposes they should have known that the company might attempt to get them to invest in the company at a later time. The Commission ruled that this places too broad a scope on the rule which requires a direct nexus between the initial referral by the associated person and the investment purchase. As to the free stock that Browne and Calandro received the Commission ruled that there was no evidence that the stock was tied specifically to any purchases of stock by investors. No evidence contradicted their claim that the stock was in payment for their general efforts in assisting the company.
FINRA clearly was over-reaching here. It changed its theory of the case in mid-stream. Referring someone to a company who is seeking to do business with the company and who later invests does not violate the selling away rule. To constitute a violation, the associated person must make the referral knowing it to be for investment purposes.