Missouri Securities Division is Investigating new Missouri Limited Liability Companies

          A membership interest in a limited liability company is a “security” as broadly defined under the Missouri Securities Act of 2003.[1] Now the Missouri Commissioner of Securities, through its Enforcement Section of the Securities Division (“Enforcement Section”), is sending letters to specified companies that have newly filed with the Missouri Secretary of State as limited liability companies or as foreign companies, which state it has received information of participation in prohibited conduct by these companies.

          Section 409.6-602(b) of the Missouri Revised Statutes[2] provides the Enforcement Section with extremely wide latitude to compel the production of written statements and documents regarding any matter that it considers relevant or material to its investigation. Some of these letters require the compulsory production of documents and written responses:

·         In narrative form detailing the objectives of the limited liability companies;

·         Listing all individuals/entities with investments in the limited liability companies to include names, addresses, telephone numbers, email addresses, and dates and amounts investments;

·         Name and address of all financial institutions where investors’ money was/were deposited; and

·         In narrative form detailing how the investors’ funds are/were used.

In seeking claims of exemption from registration or exception in these letters, the Enforcement Section seems to have assumed that these new limited liability companies are operating in Missouri as an unregistered investment adviser, broker-dealer, investment adviser representative, or broker-dealer agent, whether operating as an investment company or not.  Consequently, these letters should be taken extremely seriously because the costs of defending against Enforcement Section enforcement proceedings that assert these assumptions can be extreme, whether warranted or not.

If you receive one of these letters, you may not want to act alone and wish to consult with one of the experienced attorneys at Cosgrove Law Group, LLC. Call us at 314-563-2490.

Author: Brian St. James

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[1] §§409.101 to 409-7-703, RSMo 2016 (Cu. Supp. 2022).  

[2] §409.6-602(b), RSMo 2016 (Cum. Supp. 2022). 

Missouri Securities Division Bars Two Former Owners of Local Broker-Dealer

Steven Larson and Michael Standley owned Oakbridge Financial Services along with Kathy Winter.  All three of them functioned as registered representatives of the broker-dealer as well.  The three were also associated with a state registered investment adviser, Private Label Money Management (PPMM).  Late last year Winter agreed to pay a small fine and submit to heightened supervision due to her alleged administrative failures as president of PPMM.  She was also barred from operating as a supervisor for either a broker-dealer of RIA for two years.  Not long before that, Winter had been suspended by FINRA for selling unregistered promissory notes that went sour. 

This month her two former co-owners were barred for their failure to supervise Robert Boyer, II of the Heroic Life Assurance Company.  Larson was also tagged for over-concentrating some of his clients’ portfolios with reverse convertible securities, also known as “recons.”  Recons are:  “…complex, structured products that contain a put option held by the issuer that triggers if the underlying equity falls below a certain barrier price and stays there at the end of the term.  When the equity price triggers the put option, the investor gets a certain number of shares of the equity at the ‘strike price’.  Whether or not the barrier price is breached, the investor gets income during the term of the Recon at an above market interest rate.  The interest rate is a function of the volatility of the underlying equity.  The higher the volatility and closer the barrier price to current price, the higher the interest rate.  Recons are sold in $1,000 increments.”

All three orders can be reviewed here.

Missouri House Bill 1480 Seeks to Create Whistleblower Program under the Missouri Securities Act

Missouri House Representative Steven Weber is sponsoring House Bill 1480 (“HB 1480”) which proposes to amend the Missouri Securities Act to include provisions that establish a whistleblower program. 

HB 1480 defines whistleblower as a person who, under the whistleblower program, discloses information regarding a violation or potential violation of securities law or a rule adopted or order issued under securities laws.  The whistleblower must be employed by or associated with the following: (1) a broker dealer; (2) an issuer; or (3) a person that receives compensation for advising others of the value of securities or the advisability of investing, purchasing, or selling securities or issues or promulgates analyses or reports relating to securities as a regular part of their business. 

Since many whistleblower programs would not be as effective without the promise of anonymity, HB 1480 permits the Commissioner of Securities to collaborate with the Attorney General or other appropriate prosecuting attorney to implement procedures to ensure the confidentiality of the whistleblower.  However, the actual language of the bill states, “The ‘Whistleblower Program’ is created to receive information or records from whistleblowers and, in the discretion of the Commissioner, to maintain the confidentiality of whistleblowers.”  Thus, while it appears that maintaining the confidentiality of a whistleblower is a goal of the program, it is not guaranteed.   

In line with the notion that the identities of whistleblowers should remain anonymous, records maintained by the Commissioner as a part of the program are not public records unless the Commissioner finds that disclosure is necessary or appropriate in the public interest or for the protection of investors.  The records can also be disclosed through the legal process if they are subject to a subpoena or court order.     

The Bill would also provide whistleblowers with a cause of action against an employer for retaliation if adverse action is taken against the employee for participation in the whistleblower program.  Whistleblowers are afforded one year to bring such claims and can request the following relief: (1) reinstatement to their position without loss of seniority; (2) back pay; (3) punitive damages; and (d) costs and reasonable attorneys’ fees.  However, whistleblowers are prevented from obtaining relief if their employer proves the employee participated in the violation, was criminally convicted for the violation, or the action is clearly frivolous or vexatious. 

Whistleblower programs also exist for federal violations of securities law.  In 2010, the Dodd-Frank Act amended the Securities Act of 1934 to add a section titled, “Securities Whistleblower Incentives and Protection.” Under this program, individuals who voluntarily provide the SEC with original information that leads to successful enforcement actions resulting in monetary sanction over $1,000,000 may be eligible to receive an award from 10 – 30% of the monies collected by the SEC.  The program also prohibits retaliation from employers. 

In January, the SEC issued its 2013 report to Congress on the Dodd-Frank Whistleblower Program.  The report noted that Fiscal Year 2013 was historic for the SEC’s Office of the Whistleblower (“OWB”), paying $14,831,965 to whistleblowers whose information contributed to the success of enforcement actions.  Of the 3,238 tips received in 2013, 17.2% concerned corporate disclosures and financials, 17.1% concerned offering fraud, and 16.2% concerned manipulation, with the most over-all tips coming from California, New York, Florida, and Texas.  Missouri ranked 26^th on the number of reported tips with only 31.  Whistleblower submissions were also received from individuals from fifty-five foreign countries.   

Since the program’s creation, six individuals have received awards, four of them occurring in 2013.  The report also indicates that the program paid its largest award of over $14 million to one whistleblower whose information led to the recovery of substantial investor funds.  Thus, the awards given to the other three individuals in 2013 were much less substantial.   

Dodd-Frank’s Whistleblower Program prompted Utah to pass a similar Act in 2011 that also allows for payment to a whistleblower for voluntarily providing information that leads to the successful enforcement of a judicial or administrative action. 

Unlike Dodd-Frank’s or Utah’s Whistleblower Programs, the HB 1480 doesn’t provide for any payment for information that assists in the prosecution of securities violations.  Should this bill pass, the likelihood of the program’s success remains to be seen since there is no financial incentive to report potential wrongdoings, the anonymity of the whistleblower doesn’t appear to be guaranteed, and Missouri residents are less active in submitting tips under Dodd-Frank’s program.    

Currently, HB 1480 has been introduced and referred to the Missouri House Financial Institutions Committee.  We will keep you updated on the Bill’s progress.   

MISSOURI TAKES ACTION AGAINST RURAL BROKER FOR SECURITIES LAWS VIOLATIONS

Secretary of State Robin Carnahan today suspended the broker-dealer agent registration of a Moberly, Missouri broker, Craig McClaskey, under R.S.Mo. § 409.4-412(f) for alleged securities laws violations stemming from Mr. McClaskey’s mishandling of an 85 year-old woman’s life savings. According to the Suspension Order, the elderly woman was a neighbor and almost like family to Mr. McClaskey, who was also the beneficiary on some of the woman’s assets.

Mr. McClaskey allegedly initiated a change of beneficiary on two of the woman’s variable annuity policies, listing himself as the beneficiary on one of the policies and his wife as the beneficiary of the other policy. Mr. McClaskey and his wife were also named as beneficiaries on the woman’s mutual fund and an IRA.

In addition, Mr. McClaskey allegedly persuaded the elderly woman to liquidate approximately $52,000.00 from her savings accounts to purchase a Florida investment property that was in a depressed area, was in foreclosure and was vacant. According to the Suspension Order, the Florida property was purchased in both Mr. McClaskey’s and the woman’s name, and was to be used as Mr. McClaskey’s retirement home upon the women’s death. Mr. McClaskey also allegedly transferred the woman’s home into his name for one dollar only three months after the death of her only son.

The actions of Mr. McClaskey are a textbook example of what Secretary of State Carnahan aims to prevent under Missouri’s recently-enacted Senior Protection Act. According to Ms. Carnahan, this case only confirms Missouri's commitment to “stand up for Missouri seniors and crack down on anyone who attempts to prey on their life savings.”

Mr. McClaskey will be one of the first individuals to face the Missouri Senior Protection Act, which went into effect in August and imposes steep penalties on fraudsters who take advantage of elderly investors. The Act establishes a minimum penalty of $50,000.00 for anyone who commits criminal securities fraud against such individuals—with the maximum penalty being $1,000,000.00 and up to ten years in prison—along with an additional penalty of up to $5,000.00.

Mr. McClaskey’s actions are still being investigated, and Secretary of State Carnahan has already indicated that she will take all further action as necessary, including a possible permanent bar from the securities industry.

A complete copy of the news release from the Missouri Securities Division can be found here.

MISSOURI’S NEW SENIOR PROTECTION ACT PACKS A STRONG PUNCH

On August 28, 2009, Missouri’s new “Senior Protection Act” took effect with the goal of better protecting investors from fraud. The Act, which gained bipartisan support from Missouri legislators, was influenced by Secretary of State Robin Carnahan’s pledge to enact stronger protections for those particularly susceptible to fraud—seniors and disabled investors.

The Senior Protection Act creates harsh penalties for those who wish to take advantage of these individuals. In particular, the Act establishes a minimum penalty of $50,000.00 for anyone who commits criminal securities fraud against an elderly or disabled person—with the maximum penalty being $1,000,000.00 and up to ten years in prison—along with an additional penalty of up to $5,000.00. The Act defines an “elderly person” as a person sixty years of age or older.

The newly-enacted Senior Protection Act can be found here, under Missouri Revised Statute § 409.5-508.