Due diligence is always the key when making an investment. Regardless of who is making the solicitation or how well the potential investor may think they know the broker, firm or security, it pays to stop, evaluate the potential investment and then move forward if appropriate. In the end no matter how many cases regulators such as the SEC or FINRA bring, regardless of how extensive the investor education programs are, it is the investor who must make the final decision to put his or her capital at risk. And, of course if there is no risk, or the investor believes for some reason there is no risk, then there is no actual investment. Yet many skip the due diligence which may well have been how the defendants in the Commission’s latest enforcement case were able to raise millions of dollars supposedly for an offshore investment fund and themselves that was actually a sham. SEC v. Hede, Civil Action No. 1:20 – cv-06724 (S.D.N.Y. Filed August 21, 2020).
Defendants Minish “Joe” Hede and Kevin Graetrz were each employed at a Broker-Dealer Firm from February 2013 to April 2017. Each was terminated for failing to cooperate with an investigation by their employer into selling away – selling securities not authorized by Broker-Dealer Firm.
Broker-Dealer Firm was registered with the SEC and FINRA. Neither Defendant was registered with either the Commission or FINRA. In 2013 Mr. Borland began approaching others at the firm to act as placement agents for Off-Shore Country Fund. Mr. Graetz furnished the introductions. As with other brokers, Broker-Dealer Firm had written policies that prohibited registered representatives from offering and selling any investment to firm customers absent approval by the Firm. Since the Firm had not approved selling interests in Off-Shore Country Fund, each Defendant was prohibited from engaging in such activities.
FINRA rules also require that representatives such as Messrs. Hede and Graetz sell all securities to customers through the broker-dealer firm for which they are employed. If Defendants wanted to sell interests in Off-Shore Country Fund each was required to seek and obtain the authorization of the Firm. Neither Defendant provided notice to Broker-Dealer Firm regarding selling interests in Off-Shore Country Fund, a practice which if permitted is known as “selling away.”
Nevertheless, each Defendant began selling interests in the Fund. Approximately $9.6 million was raised from 21 customers of Broker-Dealer Firm by selling interests in Off-Shore Country Fund. Steps were taken to conceal the activity from their employer. Yet in December 2016 the Firm received a demand letter from one of its customers who had purchased notes in the Fund. The customer informed the Firm that Messrs. Hege and Graetz had urged him to purchase the notes.
In 2018 the U.S. Attorney’s Office for the Southern District of New York filed a complaint and indictment against Mr. Borland, alleging conspiracy, securities fraud and wire fraud in connection with selling interest in the Fund. U.S. v. Borland, No. 18-cr-00487 (S.D.N.Y). At the same time the SEC filed an enforcement action naming as defendants Mr. Borland, the Fund and others. SEC v. Borland, Civil Action No. 18-cv-4352. Each case alleges that Mr. Borland misappropriated millions of dollars supposedly to be invested in the Fund. In February 2019 Mr. Borland pleaded guilty to criminal charges in the criminal case. The complaint alleges violations of Exchange Act Section 15(a). The case is pending. See Lit. Rel. No. 24873 (August 24, 2020).