Your Weekly Reminder Not To Talk About Investments Without A License

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1Q2013 must be I Love The '80s Quarter at the SEC. Two weeks ago we learned that they were pestering '80s icon and junk-bond inventor Michael Milken for maybe providing investment advice for money after agreeing not to do that, and today they announced a settlement with "New York-based private equity firm Ranieri Partners, a former senior executive, and an unregistered broker" for letting that unregistered broker solicit investors for Ranieri's new Selene funds. Ranieri Partners is of course Lew Ranieri, the Liar's Poker hero, mortgage-backed-security inventor, and general man-about-the-1980s.

The situation, according to the SEC'sorders, is pretty straightforward: former Ranieri senior MD Donald Phillips enlisted his buddy, William Stephens, to fly around the country pitching potential investors on Ranieri's Selene funds, which were busy buying up non-performing mortgages. Stephens seems to have done a good job, signing up corporate pensions, university endowments, and state retirement systems. He brought in a total of $569 million in capital commitments, for which he was paid fees of $2.4 million.

The problem was that the Selene funds were a massive Ponzi scheme. No, I'm kidding, that's not the problem at all! Ranieri and Selene were and are on the up-and-up, Selene is still buying non-performing mortgages, and as far as I can tell doing so in 2008-2010 was a good trade and made those investors happy. The problem was actually that Stephens ran into some trouble with the SEC a decade ago over some unrelated kickback allegations, and ended up losing his license to be an investment advisor. And since then "Stephens has not been registered with the Commission in any capacity, including as a broker or dealer."

But he went and brokered and/or dealt anyway. By flying around the country handing out private placement memos, and by getting paid a percentage of the cash he brought in. Which violates Section 15(a) of the Exchange Act, which says you can't "effect any transactions in, or induce or attempt to induce the purchase or sale of, any security" unless you're registered as a broker with the SEC.1 And he did. I mean, he did? I guess? Here's what the SEC says:

Stephens’ longtime friend Donald W. Phillips, a senior managing director who headed up capital raising efforts for Ranieri Partners, was responsible for overseeing Stephens’ activities as a purported “finder” who would merely make initial introductions to potential investors. But Stephens’ role went far beyond that of a finder. He consistently communicated with prospective investors and their advisors and provided them with key investment documentation that he received from Ranieri Partners.

I dunno, this is all fine, but the framework is a little weird no? The SEC seems to accept, though without discussing it in any depth, that being an unregistered "finder" - making introductions in exchange for a percentage of the ultimate investment - would be okay. Being an unregistered "broker" would not. The difference is ... talking more? Handing out private placement memos that describe the terms and risks of the investment? From the order:

Although Stephens was not permitted to send documents like PPMs and subscription agreements to potential investors, he was able to obtain such documents from Ranieri Partners, as Ranieri Partners failed to limit Stephens’ access to key documents. Stephens, in turn, sent such documents to potential investors. Ranieri Partners also received Stephens’ requests for expense reimbursements, which reflected Stephens’ extensive contact with potential investors. Yet Ranieri Partners did nothing to monitor or limit Stephens’ contact with investors.

So everyone got in trouble. A little bit of trouble. Ranieri Partners and Phillips had to pay fines of $375K and $75K respectively. Stephens got a stern talking-to, but is apparently too poor to have to pay back the $2.4 million he made from these illegal deals.2

One pretend theory that just occurred to me is this: one reason the SEC goes so easy on baddies (or so everyone complains) is that it knows, deep in its little SEC heart, that many of its regulations might be unconstitutional. There's a little bit of a problem with going around telling people "you can't get paid for telling people to invest in investments without registering with the SEC." Like, go turn on CNBC, and you will find people who are paid for telling people to invest in investments and who are not registered with the SEC. Maybe not now - now it's probably a commercial for people who are paid for telling people to invest in investments and are registered with the SEC - but when it comes back. Or maybe it's American Greed, I don't know, I don't really watch CNBC.

This poor Stephens guy! (I mean, poor by hypothesis, he can't even pay back the millions he made.) He was paid to talk to people truthfully about how great Ranieri Partners was, and he did, and they were great (let's say), and that was fine. But he talked about how great they were a little too much, and, damningly, he gave investors a legal document containing the full terms and disclaimers that come with an investment in Ranieri Partners. And that took him over the line from just "guy getting paid to talk about investments" to "guy getting paid to talk about investments illegally." You can see why he might have been perplexed. And why the SEC might have been a little generous in cutting him a break on that $2.4 million.

SEC Charges Private Equity Firm, Former Executive, and Consultant for Improperly Soliciting Investments [SEC]

1.The text is worth quoting in full as a masterpiece of legalese:

It shall be unlawful for any broker or dealer which is either a person other than a natural person or a natural person not associated with a broker or dealer which is a person other than a natural person (other than such a broker or dealer whose business is exclusively intrastate and who does not make use of any facility of a national securities exchange) to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers’ acceptances, or commercial bills) unless such broker or dealer is registered in accordance with subsection (b) of this section.

A Person Other Than A Natural Person would be a truly awful name for a band, incidentally.

2.!!! From the order:

Respondent shall pay disgorgement of $2,418,379.20 and prejudgment interest of $410,248.75, but that payment of such amount is waived based upon Respondent’s sworn representations in his Statement of Financial Condition dated January 28, 2013 and other documents submitted to the Commission. Further, based upon Respondent’s sworn representations in his Statement of Financial Condition dated January 28, 2013 and other documents submitted to the Commission, the Commission is not imposing a penalty against Respondent.

TBF he paid some of the $2.4mm to sub-agents. Still: he's too poor to have to pay back the $2.4 million he made from these illegal deals.

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