WASHINGTON – Ross Sinclaire & Associates has agreed to pay $250,000 and to disgorge ill-gotten gains to settle muni rules violations with the Financial Industry Regulatory Authority after it improperly acted as a financial advisor and underwriter on the same muni issuances.
The Cincinnati-based firm also failed to disclose material facts in offering documents and was late in filing underwriting disclosures with regulators, FINRA said.
Roughly $139,500 of the fine relates to Municipal Securities Rulemaking Board rule violations and $35,455 of the total is disgorgement. The firm also agreed to hire an independent consultant who will review the firm's policies and procedures to make sure it is disclosing all material facts related to any underwriting on which it is working or offering it is selling.
RSA did not return a request for comment on the settlement.
Several of the violations relate to two private placements RSA underwrote for an unnamed county public properties corporation in 2011 and 2015. RSA had been providing financial advisory and underwriting services to the county on a series of securities offerings relating to a horse racetrack in the county since at least 1993.
The racetrack is owned and operated by a company FINRA refers to as "ARI." Murray Sinclaire, who indirectly owns 90% of RSA and was its president, chief executive officer, and managing member before June 2016, has owned 100% of ARI since April 2015 and before then owned about 40% of the company.
The county public properties corporation has leased one of the three tracts of property to the county since 1993 and the county has in turn subleased the property, which includes the racetrack, to ARI. ARI has experienced financial trouble since about 2006 and since 2012 has been in negotiations to sell some or all of its assets to another racing company.
RSA's two private placements for the public properties corporation were made in connection to refundings of $2.7 million in bond anticipation notes that had been issued in 1993 to pay for the property and the facilities built on it, including the racetrack.
The first private placement took place in 2011 and offered investors $2.4 million of "lease revenue note anticipation renewal notes," according to FINRA. The notes were only payable from the income and revenue that the properties corporation got from leasing the project facilities. FINRA found that RSA acted as both an underwriter and financial advisor on the 2011 offering, receiving an $11,000 underwriter's discount and a $5,000 advisory fee. Those actions violated MSRB Rule G-23 on activities of financial advisors, according to FINRA.
RSA also served as the sole underwriter on a 2015 private placement of $2.12 million in "lease revenue bond anticipation taxable renewal notes." Those notes were similarly only payable from lease revenues, according to FINRA. The firm received a $19,455 underwriter's fee from that issuance.
FINRA found that the private placement memos for both the 2011 and 2015 offerings also were missing a number of material facts about the property and facilities. The PPMs did not disclose that Sinclaire was a managing member of ARI and a part or full owner of the company during both offerings. The information about potential conflicts of interest wasn't included even though ARI, as the sublessee of the project site, was a beneficiary of the offering proceeds.
The memos additionally did not disclose that the county subleased the project facilities to ARI or that the county's lease payments to the issuer were derived solely from the sublease payments ARI made to the county. They also did not give a description of: the site or facilities; how the site and facilities were used; how revenues were generated from the facilities; or the racetrack. Additionally, there was no mention that ARI was in financial trouble.
FINRA found that these failings constituted violations of MSRB Rule G-17 on fair dealing and that the firm's failure to have written supervisory procedures to prevent the lack of disclosure was a violation of MSRB Rule G-27 on supervision.
RSA worked as both an advisor and underwriter on the same issue ten times between July 2013 and June 2015, FINRA said, each time in violation of G-23. Additionally, RSA did not provide disclosures required under G-17 "at the earliest stage in the relationship" in all of those issues as well as in an additional issue with a school district, FINRA found.
Those failures also showed supervisory shortcomings and constituted violations of G-27.
From February 2014 to May 2015, FINRA found that RSA sold 20 competitive municipal offerings but did not maintain documentation of evidence that it had conducted adequate due diligence, including an analysis of the offering documents to determine their accuracy and that due diligence was supervised by a firm principal. Those actions violated Rules G-17 and G-27, according to the settlement.
Additionally RSA, between February 2014 and May 2015, did not verify the identity of 476 investors in offerings who did not have brokerage accounts with the firm and invested directly with the issuer, FINRA found. Federal regulations require that dealers establish, document and maintain a written customer identification program and failure to do so is considered a violation of FINRA's anti-money laundering Rule 3310.
FINRA also cited a number of instances between June 2009 and August 2011 that RSA did not submit timely information to the MSRB's EMMA system while underwriting muni offerings. The disclosure failures violated MSRB Rule G-32 on disclosures in connection with primary offerings, FINRA said.
