Cantone Research Inc., located Tinton Falls, New Jersey, along with its President and majority owner, Anthony J. Cantone, and Christine L. Cantone have been named by Financial Industry Regulatory Authority (FINRA) Department of Enforcement in a Complaint alleging fraudulent misrepresentations and omissions of material fact in connection with the sales and subsequent extensions of over $8,000,000.00 in certificates of participation and certain promissory notes. Department of Enforcement v. Cantone Research Inc. et al., No. 2013035130101 (Nov. 20, 2015).

According to the Complaint, from approximately 2010 through 2013, the firm, acting through Anthony J. Cantone, made the fraudulent misrepresentations and omissions in connection with the certificates of participation and promissory notes. The Complaint indicated that four of the five relevant promissory notes had defaulted, which resulted in nearly $6,000,000.00 in losses to investors. CRI and Cantone reportedly received fees, commissions and other payments in connection with the offerings in excess of $1,000,000.00.

The Complaint indicated that the promissory notes were executed on behalf of entities controlled by Christopher Brogdon, who worked in the assisted living and nursing home industry. Based on the terms of the certificates of participation, the investors’ money would be used by Brogdon to purchase and/or redevelop a nursing home, assisted living facility, or other real-estate controlled by Brogdon. The Complaint stated investors were promised the return of their principal along with 10% interest.

The Complaint further alleged that at the time CRI and Cantone had solicited the investors to invest in the certificates of participation and at a subsequent point when Cantone extended certain certificates of participation, CRI and Cantone had either misrepresented or failed to disclose material information to investors which cast considerable doubt on Brogdon’s ability to successfully make required principal and interest payments.

According to the Complaint, CRI and Cantone had misrepresented and/or failed to disclose material facts which included that Brogdon had twice been barred from the securities industry (once for egregious misconduct involving unauthorized transactions and another for a scheme involving financial misconduct); that Brogdon had been indicted for theft, racketeering, and Medicaid fraud; that Brogdon had been found liable for breaching a stock repurchase guarantee agreement; and that several entities which Brogdon was in control of had filed for bankruptcy.

The Complaint additionally alleged that Brogdon breached the terms of the promissory notes by failing to make required principal and interest payments, and rather than informing investors of such, CRI and Cantone engaged in conduct to conceal the defaults from investors by secretly covering the interest payments on Brogdon’s behalf. CRI and Cantone reportedly continued to solicit new investors for the certificates of participation after the defaults without disclosing such information to the prospective investors.

FINRA has further alleged that CRI and Cantone made improper use of the portion of the investors’ funds and recommended to at least forty-six CRI customers that they purchase a COP in a promissory note without having a reasonable basis to believe that such investment was suitable. Finally, FINRA alleged that as Anthony Cantone’s supervisor, Christine Cantone failed to supervise Anthony Cantone’s sale of securities to at least one hundred CRI customers.

Five causes of action were alleged in the Complaint on the aforementioned conduct, where CRI and Cantone willfully violated (1) Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, FINRA Rules 2020 and 2010; (2) acted in contravention of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and FINRA Rule 2010 (pled in the alternative to the first cause of action); (3) FINRA Rules 2150 and 2010 for improper use of customers’ funds; (4) FINRA Rules 2111 and 2010 for unsuitable recommendations, and; (5) NASD Conduct Rule 3010 and FINRA Rule 2010 for CRI and Christine Cantone’s failure to supervise Anthony Cantone.

Public disclosure records via FINRA’s BrokerCheck reveal that Anthony Cantone has been subject to eight disclosure incidents, and Christine Cantone has been subject to six. On August 24, 1994, Cantone was discharged by Gruntal & Co, Inc. after two unregistered callers used unapproved scripts allegedly provided by Mr. Cantone. On July 6, 2001, a Cantone customer received an award/judgment against Cantone for $10,000.00 after alleging poor performance. On October 8, 2003, another Cantone customer received an award/judgment against Cantone for $250,000.00 after alleging unsuitability and breach of fiduciary duty.

On June 12, 2010, Anthony and Christine Cantone settled a customer dispute for $800,000 after claimants alleged failure to supervise, breach of fiduciary duty, negligence. On November 20, 2015, New Jersey Bureau of Securities revoked Anthony and Christine Cantone’s securities licenses amid allegations of engaging in dishonest or unethical practices in the securities industry by offering and selling unregistered securities and making misrepresentations and omitting material facts to investors in connection with the sale of securities. They are also subject to a pending civil action initiated by New Jersey Bureau of Securities in connection with their conduct.

Section 10(b) of the Exchange Act makes it unlawful “to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”

Four elements are necessary to show in finding a violation of Section 10(b) of the Exchange Act, Rule 10b-5: 1) misrepresentations and/or omissions were made; 2) misrepresentations and/or omissions were material; 3) representations and/or omissions were made with requisite intent (e.g. scienter), and 4) misrepresentations and/or omissions were made in connection with the purchase or sale of securities.

Finally, FINRA Rule 2111 requires that associated persons have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer. FINRA will generally find this rule to be violated, as is the case with Torres, when the individual does not have a basis to believe that the recommendation is suitable for at least some investors, that the recommendation is suitable for a particular customer considering the customer’s investment objectives and financial profile, and (for the accounts where the individual is exercising discretion) that a series of recommended transactions are not excessive and unsuitable even if each transaction alone would be deemed suitable.

Guiliano Law Group

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