The allegations read: Clements was named a respondent in a finra complaint alleging that his member firm, he as its founder, chief executive officer (ceo) and chief compliance officer (cco), and a representative, committed fraud in the sale of equity or promissory notes of the firm or its branch offices, and the cco aided and abetted fraud. Most of the sales were to elderly customers of the firm, and the respondent's capital raising practices are continuing. The complaint alleges that clements directed the representative to contact his customers regarding investing in the firm, and to offer a one percent interest in the firm for every $50,000 invested, without explaining any basis for the price of the equity or providing the representative with any information regarding the firm's financial condition, recent investments in the firm at far lower prices, or a plan of action the firm submitted to its clearing firm. One of the investors the representative solicited agreed to invest $250,000 for a five percent equity interest in the firm. In connection with the sale of the firm's equity to this investor, the firm, through him, knowingly omitted a material fact necessary to make the statements made to the investor not misleading. Specifically, the firm, through the representative, failed to disclose that it was facing a dire regulatory capital situation as a result of a $190,000 margin call and faced the prospect that it would soon fail its regulatory capital requirement. Clements prepared the investor's purchase agreement, which contained the terms of the investor's investment. Through the investor's purchase agreement, clements knowingly represented that the purchase price of a one percent share in the firm was $50,000, without disclosing that an elderly investor paid half that price 22 days earlier and that his mother paid a small fraction of that price 27 days earlier. The fact that the firm sold the equity interests in the firm at far lower prices within the previous month was a material fact. By engaging in the foregoing conduct, the respondent willfully violated section 10(b) of the exchange act and rule 10b-5. The complaint also alleges that prior to the representative's solicitation of the investor's $250,000 investment in the firm, clements directed the representative to raise equity from customers, including the investor, and to state that invested funds would be used for the firm's day-to-day operations and growth. The representative did so. However, as clements was aware, the firm was facing a regulatory capital crisis and needed the investor's investment to meet its net capital requirement and avoid another suspension of its securities business. This was a material fact to the investor. Prior to another representative's solicitation of investors to purchase equity or debt from a holding company of the firm's branch office, clements advised this representative that he could treat investor funds as his own. Clements also knew, from his review of the senior promissory notes issued to investors that the representative promised to use the proceeds for general operating expenses and growing the holding company. Clements was or should have been aware, from his review of the company's financial records, that the representative was actually using proceeds from equity investments and promissory notes for the representative's personal needs. The use of the company's investment proceeds for the representative's personal needs was a material fact to investors. Accordingly, clements provided knowing and substantial assistance to the representative in his fraudulent sale of the firm's equity to an investor and to the other representative in his fraudulent sales of equity or debt in the holding company to investors. By engaging in the foregoing conduct, clements aided and abetted violations of section 10(b) of the exchange act of 1934, rule 10-5 thereunder.
