Merrill Lynch Stockbroker Sanctioned For Selling Away
Frank Howard Zito of Ridgeland Mississippi a stockbroker formerly registered with Merrill Lynch Pierce Fenner Smith Incorporated has been sanctioned by the Office of the Mississippi Secretary of State Securities Division according to a Consent Order containing findings that (1) Zito engaged in private securities transactions during the time that he was associated with Merrill Lynch and (2) Zito lied to the securities broker dealer about selling away. Administrative Consent Order LS-18-3126 (Nov. 2, 2018).
According to the Order, during the period in which Zito was associated with Merrill Lynch, he failed to inform the securities broker dealer about his activities involving Madison Timber Properties. Merrill Lynch was not provided information about Zito receiving finders’ fees by Madison Timber for introducing Madison’s principals to a firm for a private placement offering which resulted in sales of interests between 2011 and 2018. In fact, the Securities Division stated that $227,750.00 in finders’ fees and commissions had been received by the stockbroker from Madison Timber or other entities involved in the securities sales.
The Securities Division stated that before any disclosure had been made by Zito in regard to Madison Timber, he arranged for one of his customers, RF, to invest $500,000.00 in that company. The Securities Division stated that Zito’s involvement in RF’s transaction was extensive – Zito provided the customer documentation to sign in regard to the investments; he discussed scheduled payments on promissory notes; and he facilitated RF’s acquisition of the interests. In fact, more than $5,000,000.00 had been invested in Madison Timber by RF through fifteen transactions enabling the stockbroker to receive as much as $90,000.00 in commissions.
The Securities Division confirmed that Madison Timber was not an investment Merrill Lynch offered to customers, nor was it authorized to be sold by stockbrokers. Transactions involving Madison Timber that were facilitated by Zito were never placed on the securities broker dealer’s records or books. In addition, the securities issued by Madison Timber had not been registered through the Securities Division and there were no exemptions to registration.
There was no point in which Zito disclosed to Merrill Lynch that he sold the Madison Timber securities away from the securities broker dealer, and the stockbroker concealed the commissions he received. Zito completed questionnaires administered by Merrill Lynch in which he conveyed that he did not earn compensation from third parties or customers for activities occurring outside the scope of his employment. He conveyed that he did not advise anyone in regard to offerings, purchases, sales or private securities transactions not sponsored or approved by Merrill Lynch or Bank of America.
Madison Timber was charged by Securities and Exchange Commission (SEC) in a Complaint alleging that its founder, Arthur Lamar Adams, engaged in securities fraud through executing a Ponzi scheme. Securities and Exchange Commission v. Madison Timber Properties LLC et al. Case No. 3:18-cv-252-OPJFKB (Apr. 20, 2018). The Complaint alleged that investors were told by Adams that Madison Timber would use their funds to obtain timber-harvesting rights from landowners. SEC alleged that investors were promised twelve-to-fifteen percent annual returns and that profits would be generated after the company harvested the timber.
SEC alleged that (1) no harvesting rights were obtained by Madison Timber (2) Adams forged documents or otherwise created false documents that contained valuations of timber and (3) earlier Madison Timber investors were paid with funds that the company procured from newer investors in a manner which was indicative of a Ponzi scheme. The Complaint stated that Adams and Madison Timber’s conduct was violative of Securities Exchange Act of 1934 Section 10(b), Rule 10b-5 and Securities Act of 1933 Section 17(a). On May 9, 2018, Adams pleaded guilty to wire fraud.
Zito was discharged by Merrill Lynch on June 25, 2018 founded on allegations that he sold away from the securities broker dealer through his transactions involving RF – whose complaint to the Securities Division resulted in its enforcement action against Zito. The stockbroker has been registered with Coker Palmer since August 31, 2018.