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Finra Sanctions For Selling Away Sustained - Ignorance Defense Rejected

Harry Friedman, Exchange Act Rel. 64486, May 13, 2011

Finra fined Friedman $77,500 and suspended him from all types of association for engaging in private securities transactions without providing written notice to his broker-dealer employer.

Friedman was a branch office manager and assisted in a reverse merger. He and a rep at the firm each purchased $12,500 of stock in the resulting public company for a penny a share prior to the stock's opening for trading. He later sold almost half his stock for $1.25 and $1.40 per share in violation of a lock-up agreement that prohibited resale of the stock until a later date reaping a profit of $550,000. Friedman did not report either the initial purchase or the resale of the stock to his employer.

Friedman's partner claimed he had given oral notice of the transactions to their employer, but no evidence of written notice was produced. Finra Rule 3040 requires prior written notice of any private securities transaction. Oral notice does not satisfy the rule. The hearing panel also found the claim to have given oral notice not credible. As is its practice, the Commission upheld that credibility finding. Further, the Commission noted that each person who engages in a private transaction must individually give written notice of such transactions and Friedman could not rely on any notice given by his partner.

The Commission rejected Friedman's claim that Finra Rule 3030 exempted him from the requirements of Rule 3040. Rule 3030 exempts passive investments in instruments other than securities from the notice requirements of Rule 3040. Since these transactions involved securities the Rule 3030 exemption did not apply.

Last, the the Commission rejected Friedman's defense of ignorance of the rule's requirements. It noted he had nine years of securities industry experience and was a registered principal and branch manager. He failed to consult the his firm's compliance manual, which had he done so would have alerted him to the need to report the transactions. Further, associated persons are "assumed as a matter of law to have . . . knowledge of [SRO] rules and requirements."