FINRA recently filed a complaint against a South Carolina-headquartered broker-dealer that allegedly charged exorbitant fees in connection with saltwater disposal well investments. The defendant, Sandlapper Securities, is a mid-size firm that employs about 60 brokers across its 13 locations.
According to FINRA, Sandlapper “participated in a fraudulent scheme and defrauded investors by selling investments in saltwater disposal wells at excessive, undisclosed markups through a middleman ‘development’ company owned and controlled by the firm, its CEO and a firm principal.” The fraudulent markups of as much as 270% “totaled over $8 million,” according to the complaint.
Starting in 2012, Sandlapper allegedly started using a development company as an intermediary between the fund and the saltwater well purchases, charging the fund substantial markups.
According to FINRA’s complaint, the fund, Tiburon Saltwater Reclamation Fund I, “had the resources to directly purchase interests in these wells. But instead, [respondent] and Bixler had their development company purchase interests in the wells and sell those interests to the fund at undisclosed, excessive markups.”
A respondent later made use of the development company to allegedly extract ill-gotten profits from retail investors, buying interest in saltwater wells and selling it to them at markups as high as 376% alleges FINRA. FINRA claimed that the connection between the fund and Sandlapper is inescapable, as its management was housed at the broker-dealer’s headquarters in Greenville. Between mid-2011 and the end of 2013, retail investors purchased $12,5 million worth of Tiburon Saltwater Reclamation’s securities.
FINRA alleged that the development company even borrowed money from investors to purchase interest in saltwater wells that was later sold to them at inflated prices.
For FINRA, one of the respondent’s activities in connection with the fund involved several conflicts of interest. The firm allegedly overlooked these problems and failed to appropriately supervise the fund’s dealings.
Sandlapper is no stranger to bad press. A June 2017 analysis by Reuters found that Sandlapper is one of the firms with the highest concentration of brokers with FINRA-mandated disclosures involving the 12 most serious incidents, such as termination after misconduct allegations, regulatory sanctions, civil judgments, and personal bankruptcies.
As of mid-2017, a rather significant 39% of Sandlapper’s brokers had this type of disclosures on file.
In a context where FINRA has vowed to protect retail investors as one of his top priorities, the complaint against Sandlapper is a clear sign that FINRA plans to increasingly scrutinize firms that defraud small, inadvertent investors.
Broker-dealers running afoul of FINRA enforcement personnel should quickly connect with an experienced securities law firm.
At Herskovits PLLC, our 20 years’ experience points to proactive action to diffuse or settle investigations early on to minimize disruption to your business. However, if FINRA has it wrong, our FINRA defense focused lawyers have an excellent track record in securities litigation. Learn your position and options on a Confidential Call 212.897.5410 or Connect with us Online