FINRA AWC Provides New Defense To Allegation Of “Willfulness”

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I dare you. In fact, I double-dog dare you to figure out how or why FINRA decides to charge willfulness in some cases but not in others.  Bottom line is that it is nearly impossible (except if you’re a big firm, in which case you can rest easy that FINRA will manage to skip the willfulness charge in your Enforcement action).  In support of this conclusion, I submit this AWC, published a week or so ago.

Steven Gribben had a brief stint in the securities industry, about five years in all.  For one year, from 2017-2018, he was registered through Alpine Securities as an Investment Banking Representative.  While with Alpine, Mr. Gribben founded the firm’s 3(a)(10) investment-banking business.  What, exactly, does that mean?  According to the AWC,

Section 3(a)(10) of the Securities Act provides an exemption permitting a company, in certain circumstances, to extinguish debts and claims in exchange for court-approved issuances of unregistered securities that generally are freely tradeable.  More specifically, in relevant part, Section 3(a)(10) exempts from registration securities issued in exchange for “bona fide outstanding . . . claims,” if a court conducts a public hearing and finds the terms of the issuance to be fair to the company and to those receiving the shares.

Here is how Mr. Gribben worked his business, step-by-step, in 11 deals he did while he was with Alpine:

First, a third-party investor worked with a microcap company to identify “claims” (i.e., outstanding payables) that the investor could purchase from creditors of the company.

Second, the investor then recruited Alpine to serve as the microcap company’s placement agent.  As placement agent, Alpine’s nominal role included finding investors to purchase the microcap company’s debt (notwithstanding the fact that it was the third-party investor who had recruited Alpine in the first place).

Third, through its placement agent agreement – all of which Mr. Gribben signed – Alpine became a creditor of the microcap company, which typically agreed to pay Alpine 10% of the total debt that the investor purchased from the microcap company’s creditors.

Fourth, Alpine executed a claim purchase agreement – again, all signed by Mr. Gribben – in which it sold to the investor Alpine’s claim (the 10% placement agent fee) against the microcap company.  The microcap company’s other creditors also entered into claim purchase agreements with the investor, pursuant to which each creditor sold to the investor its interest in the microcap company’s payables.

Fifth, the investor then filed a lawsuit against the microcap company for the total amount of the payables, including Alpine’s claim against the microcap company for its 10% fee.

Sixth, the investor and microcap company then executed a settlement agreement, pursuant to which the investor’s newly-purchased debt was exchanged for shares of the microcap company’s common stock.

Seventh, the court where the lawsuit was filed scheduled a hearing to determine whether the terms and conditions of the settlement were fair to the microcap company and to the investor.

Eighth, after the court conducted the hearing and approved the fairness of the 3(a)(10) debt-for-shares exchange, the microcap company issued the shares to the investor.

Finally, Alpine then served as the clearing firm through which the investor deposited and liquidated the settlement shares of the microcap company.

This was not an insignificant business for Alpine.  According to the AWC, all of the requested share issuances were approved, in exchange for payables totaling $3,025,520.30 from 40 creditors.  The exchanges resulted in approximately 7.5 billion shares being issued to third-party investors, who then deposited them with Alpine.  Alpine sold the shares on the open market for over $2.7 million.  This, ultimately, is how Alpine made its money on the deals, from commissions on the liquidations.

So, that’s all background.  What, exactly, did Mr. Gribben do wrong that got him in trouble?  He made two material misrepresentations in the claim purchase agreements.  In ten of the 11 3(a)(10) transactions, he falsely represented in the claim purchase agreements that Alpine “did not enter into the transaction giving rise to [Alpine’s] Claim [against the microcap] in contemplation of any sale or distribution of [the microcap’s] common stock or other securities.”  This was blatantly false, as the principal reason Alpine entered into the placement agent agreements was to facilitate the distribution of common stock pursuant to Section 3(a)(10).  In addition, in two of those ten claim purchase agreements, Mr. Gribben also falsely misrepresented that Alpine was “not a broker or dealer in securities.”  Hmm, sounds bad.

Exacerbating his misconduct, Mr. Gribben knew that investors would be filing the claim purchase agreements in court, where they were a necessary part of the mechanism that ultimately resulted in the issuance, and subsequent sale by Alpine, of the shares for which the debt was exchanged.  The AWC recites that Mr. Gribben’s “misrepresentations may have impacted the courts’ understanding of the proposed settlements, and may have influenced the courts’ decisions to approve the exchanges of unregistered securities for Alpine’s claims.”

Got all that?  Multiple material misrepresentations that may have directly influenced the court’s rulings.  Sounds very bad.

Well, not so much.  Mr. Gribben got suspended for a piddling three months and a $7,500 fine.  But, even crazier, get this:  FINRA found that Mr. Gribben did not act willfully.  As the AWC put it, “Gribben’s conduct . . . was negligent—he did not read the claim purchase agreements carefully before signing them, despite knowing that they would be submitted to a court.”

I simply cannot wait to use the “Gribben defense” next time one of my clients is accused of signing something that FINRA claims contains a false statement, especially a document that could result in a statutory disqualification if there is a finding of “willfulness.”  Perhaps a U-4, where a tax lien is not timely disclosed.  Perhaps an annual OBA certification.  Perhaps, even, an 8210 response.  “I didn’t read it carefully before signing it.”  I love it!  So simple, so easy.  Of course, I would point out that I have made that very argument before, as, I am sure, have countless other defense lawyers, but I have never achieved the success that Mr. Gribben did here.  Kudos to Mark David Hunter, Mr. Gribben’s attorney, for pulling off this coup, and for providing this settlement as precedent.  FINRA, as you may know, does not consider prior settlements to be binding precedent, but, still, at a minimum, this case will clearly preclude FINRA from claiming that it never accepts the “I didn’t read it” defense.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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