William H. Murphy Co. Inc. a broker-dealer headquartered in Houston Texas and William H. Murphy (president and chief compliance officer) are subject of a National Adjudicatory Council Decision which affirmed FINRA’s Extended Hearing Panel’s findings that the firm effected unregistered and non-exempt securities transactions and failed to supervise the firm’s business practices to ensure compliance with federal securities laws. In the Matter of Department of Enforcement v. William H. Murphy Co. Inc. et al. No. 2012030731802 (Oct. 11, 2018).

According to the Decision, the firm entered into agreements to exclusively sell Guardian Equity Fund, LLC (GEF), Multi-Family Real Estate Fund II, LLC (MFREF2) and Multi-Family Real Estate Fund II, LLC (MFREF3) membership interests, which were deemed securities. The firm also relied upon a company, LREA to provide networking and educational materials to those interested in investing in real estate. Apparently, investors had purchased the membership interests, pooling funds for the purpose of acquiring apartment properties and profiting through Guardian Equity Management L.L.C. management efforts.

Evidently, representatives of WHM solicited the investors to buy the securities, and met with customers to discuss their goals and suitability for the investments. Consequently, a total of $1,031,700.00 had been invested by twenty-three investors; the firm was paid commissions as the seller of the securities.

Critically, the Decision noted that there had been no basis by which the firm was able to participate in those unregistered securities sales because there was no exemption from registration present. That is, there were no registration statements that the firm had filed, and the firm had not satisfied its burden to meet a Regulation D Rule 506(b) exemption. FINRA found that the firm failed to meet that exemption because of its engagement in general advertising and solicitation of the securities.

Particularly, FINRA noted that a key factor behind the Regulation D, Rule 506(b) exemption applying was the lack of any general solicitation or advertising in the course of the issuer’s or the issuer’s representatives’ offering or selling securities. In the firm’s case, FINRA found that it was obvious that the firm had used workshops and radio shows to offer and sell the securities. Representatives of the firm reportedly hosted those shows and workshops, and it was not just for workshop purposes. Rather, the firm’s representatives specifically intended on generating interest from investors for the real estate securities that it sold.

In addition, FINRA stated that the firm did not show that it had existing relationships with the twenty-three investors, and as a result, it was unable to show that it did not generally solicit the investors. FINRA noted that the workshops that attracted investors were broadcast to the general public, and had been executed by representatives of the firm to generate interest from the attendees for investing in real estate. The firm reportedly did not have any substantive relationship with those investors beforehand. FINRA found that the firm’s unregistered and non-exempt securities sales were violative of FINRA Rule 2010.

In addition, FINRA stated that the firm failed to supervise its business practices to ensure that the firm had complied with Securities Act of 1933 Section 5. The Decision stated that on the firm’s behalf, Murphy neglected to fulfill his obligations of implementing and enforcing a supervisory system and written supervisory procedures concerning private placement marketing and sales to ensure that the firm complied with FINRA Rules and the Securities Act of 1933.

Apparently, all private placements that the firm sold were supposed to have been supervised by Murphy. Murphy was reportedly responsible for reviewing and approving the advertising material for private placements. In addition, the Decision stated that he was tasked with reviewing sales activities and accepting customers’ accounts, and responsible for supervising the registered representatives and the actions of LREA relating to the GEF, MFREF2 and MFREF3 membership interests.

Apparently, the firm’s written supervisory procedures neglected to provide reasonable procedures concerning the activities of LREA to ensure that non-registered and non-exempt securities were not sold to the public. The firm seemingly lacked any procedures for identifying red flags concerning the workshops, radio shows or sales. Moreover, the Decision stated that Murphy failed to reasonably evaluate the model used by LREA to ensure that it was complaint with FINRA Rules and federal securities laws.

FINRA stated that Murphy should have been alerted to the fact that the customers who invested in the private offerings came from the real estate securities conducted through LREA. In addition, the firm failed to adopt supervisory procedures that would disallow customers from buying the offerings before a substantive relationship with the issuer or William H. Murphy Co. had been established. Consequently, FINRA found that the firm and Murphy ’s supervisory failures constituted violations of FINRA Rules 2010 and NASD Rule 3010. The firm and Murphy were jointly fined $50,000.00 by FINRA, and Murphy was suspended by FINRA in all capacities for six months.
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