Stephen Brown, of Pittsford, New York, a stockbroker formerly registered with Merrill Lynch, Pierce, Fenner & Smith, Inc., was charged by Financial Industry Regulatory Authority (FINRA) Department of Enforcement in a Complaint based upon allegations that he, inter alia, engaged in private securities transactions and outside business activities without disclosing them to his firm. Department of Enforcement v. Stephen Brown, No. 2014042690502 (Apr. 1, 2016).

According to the Complaint, between 2009 and 2014, Brown took part in private securities transactions and an outside business activity, where the disclosures he made to his firm were neither accurate nor complete in regard to his conduct. Particularly, the firm reportedly disallowed stockbrokers from effecting transactions away from the firm with customers of the firm. Additionally, the Complaint stated that stockbrokers were not allowed to engage the firm’s customers in any manner via outside activities.

The Complaint revealed that Brown lied about his involvement and omitted information that pertained to customers’ investments in an entity which Brown established called Iron Smoke. Particularly, Brown was alleged to be less than forthcoming concerning his management of Lorax, an investment pool, in addition to the firm’s customers having made investments in private enterprises which Brown was an investor in. Moreover, he purportedly failed to be transparent with the firm concerning his investments in companies which the firm’s customers maintained director and principal roles of.

The Complaint stated that Brown was internally investigated in 2014 concerning his wrongdoing; however, he deceptively responded to the firm’s counsel and managerial staff pertaining to the nature of his outside business activities and private securities transactions. Brown apparently tracked customers’ investments made outside of the firm; however, he claimed to have been ignorant of customers’ outside investments when questioned by Merrill Lynch. FINRA Department of Enforcement alleged that Brown’s conduct in this regard was violative of FINRA Rule 2010.

Brown reportedly played a substantial role in Lorax, such as helping investors including Merrill Lynch customers invest in the entity and acquire more private enterprises. The Complaint stated that Brown only informed Merrill Lynch that his family would be involved in the Lorax transactions, leading the firm to provide him authorization to pursue the activity. FINRA Department of Enforcement alleged that Brown’s failure to update his firm about these activities was conduct violative of FINRA Rules 2010 and 3040.

Brown was also alleged to have omitted from Merrill Lynch that he actively operated Lorax, wherein he facilitated customers’ investments into several entities in connection with their investments in Lorax. The Complaint alleged that the records and books, as well as Lorax’s distributions to investors, had been handled by Brown. Further, the financing of Iron Smoke and voting rights associated with the entity had not been disclosed by Brown to Merrill Lynch, according to the Complaint. Apparently, Brown merely claimed to be a passive investor in Iron Smoke. FINRA Department of Enforcement alleged that Brown violated FINRA Rules 2010 and 3270 by not apprising the firm about his active involvement in Iron Smoke and Lorax.

Financial Industry Regulatory Authority (FINRA) Public Disclosure reveals that Brown has been identified in four customer initiated investment related disputes containing allegations of his misconduct while employed with Merrill Lynch, Pierce, Fenner & Smith Inc. Specifically, on April 26, 2010, a customer filed an investment related written complaint involving Brown’s conduct, based upon allegations that Brown failed to abide by the customer’s instructions concerning mutual fund and equity transactions.

On July 20, 2012, another customer filed an investment related written complaint regarding Brown’s activities, based upon allegations that Brown induced the customer’s commodity option transaction due to misrepresentations. Further, on October 5, 2012, a customer initiated investment related written complaint involving Brown’s conduct was settled for $510,905.00 in damages based upon allegations that Brown made misrepresentations to the customer concerning the risks of options products. Moreover, on May 9, 2013, another customer complaint concerning Brown’s activities was settled for $13,462.93 based upon allegations of misrepresentation.

Brown’s registration with Merrill Lynch was terminated on September 19, 2014, based upon allegations cited in FINRA’s disciplinary action against him. Since October 20, 2014, Brown has been associated with Stifel, Nicolaus & Company, Inc.

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