FINRA Suspends Chicago Broker Following Alleged Scheme to Defraud Investors Perpetrated With His Brother Whom the SEC Barred
From the Desk of Jim Eccleston at Eccleston Law Offices:
FINRA (the Financial Industry Regulatory Authority) has suspended a Chicago-area broker for his role in a scheme to defraud investors. What is unique is the fact that the broker engaged in a team effort with his brother, an investment adviser whom the SEC (the Securities and Exchange Commission) barred. The SEC also expelled the adviser’s investment advisory firm. Let’s compare the two sanctions imposed by the two regulators.
The SEC complaint, filed in November, 2012, named Joseph Hennessy and his investment advisory firm, Resources Planning Group, Inc. (RPG). The SEC alleged that RPG and Joseph Hennessy “knowingly engaged in a fraudulent scheme to raise funds from investors in a private equity fund called the Midwest Opportunity Fund, LLC (MOF).” The raise was successful as $6.9 million was raised, mostly from advisory clients of RPG, who were given promissory notes or units in MOF.
The SEC complaint noted that Joseph Hennessy was one of the founders and controllers of MOF. Of course, he also was the investment adviser to his clients in RPG, thus owing them a fiduciary duty.
According to the SEC, the fraud occurred from 2007 through 2012. The SEC alleged that Joseph Hennessy “made misrepresentations about the nature and the prospects of the MOF investment and failed to inform investors about the existence of MOF promissory notes that Hennessy had personally guaranteed.” The SEC complaint also alleged that Joseph Hennessy “misappropriated investor funds to make MOF debt payments, and otherwise engaged in a variety of conduct which operated as a fraud and deceit on investors.” Subsequently, in July, 2013, the SEC barred Joseph Hennessy from the securities industry. In November, 2013, the SEC revoked the investment adviser registration of RPG.
The tale of two brothers continues with Terrance Hennessy. FINRA did not bar Terrance Hennessy from the industry, but instead, settled his disciplinary case. His settlement, known as an “Acceptance Waiver and Consent” (AWC), reflects a relatively light sanction of an 18-month suspension and some fines.
Terrance Hennessy (and his small brokerage firm, HLM Securities, Inc.) consented to FINRA’s sanctions and, without admitting or denying the findings, consented to the entry of findings. Those findings included the following:
- Terrance Hennessy failed to provide written notice to the firm prior to, or even subsequent to, his participation in the purchase of membership interests in limited liability companies, as required by the firm’s written supervisory procedures;
- Terrance Hennessy gave “misleading and evasive responses” to FINRA during its investigation, and “provided contradictory and misleading responses to customer complaints regarding his involvement in the purchase of membership interests”;
- Terrance Hennessy, as the firm’s president and chief compliance officer failed to implement procedures or controls to determine whether he and others had engaged in private securities transactions, and he failed to supervise his own and others’ private securities transactions and include them on the firm’s books and records; and
- Terrance Hennessy also willfully failed to disclose a judgment on a Form U-4 filing with the Central Registration Depository (the CRD), and indeed made an affirmative misrepresentation on a Form U-4 amendment.
Those findings, standing alone, let alone together, easily could have resulted in a bar from the securities industry.
So, why is there a disconnect between the SEC and the FINRA sanctions? No one ever will know for sure why one brother was barred by the SEC and the other brother received a relatively light sanction from FINRA. But let me offer a few possible explanations.
First, Joseph Hennessy appears to be the only one of the two brothers who “misappropriated” investor funds – a serious offense. The SEC alleged that he misappropriated funds from at least two investors. Second, and in connection with one such misappropriation, the SEC alleged that Joseph Hennessy forged a client’s signature on documents – another serious offense. Finally, the SEC also alleged that Joseph Hennessy failed to disclose to investors purchasing MOF promissory notes that he was unable to meet his personal guarantees made on earlier sold MOF promissory notes.
All in all, the two disciplinary cases, one before the SEC and the other before FINRA, represent an unusual and interesting comparison, with a unique familial twist!
The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.
Related Attorneys: James J. Eccleston