SEC, FINRA, DC Sanction Success Trade
A recurrent theme in today’s enforcement environment is parallel and often overlapping proceedings. That is the case with a District of Columbia based broker that drew sanctions from the SEC, FINRA and DC. In the Matter of Success Trade, Inc., Adm. Proc. File No. 3-16755 (August 14, 2015).
Respondent Success Trade is the Washington, D.C. based parent of registered broker dealer Success Trade Securities, Inc., also a Respondent, and BP Trade, Inc., a software company. Both are operated by Fuad Ahmed, as is BP Trade. Success Trade Securities operated as a deep discount broker.
The firm never generated sufficient cash flow to be successful. Success Trade lost over $600,000 in 2008. Working capital was raised by issuing two ten year promissory notes totaling $800,000 to a New York investor with annual interest rates of 50-53%. To repay the notes in March 2009 Respondents put together an offering of Success Trade notes. Those notes were marketed largely to the clients of Investment Adviser A, a firm based in McLean, Virginia which catered to professional athletes. Many of Adviser A’s clients had brokerage accounts at Success Trade Securities. Mayn of Adviser A’s clients were young and financially unsophisticated – not qualified investors.
The notes were offered using a PPM. It claimed the bulk of the offering proceeds would be used to grow the business. A chart in the PPM illustrated how the proceeds would be spent. Those statements did not, however, reflect the actual manner in which the investor funds were employed. In fact those funds were expended to pay: interest to the New York investor; Investment Adviser A; Mr. Ahmed’s personal expenses; and to fund a loan to Mr. Ahmed’s brother. The PPM contained other misrepresentations.
By November 2012 Respondents were again facing severe financial pressure. Success Trade did not have cash flow to cover its obligations. Accordingly, Respondents persuaded a number of note holders to either extend the notes or convert their investment to equity, typically offering higher interest rates or lower conversion prices than were authorized by the PPM. In connection with those efforts, note holders were not told the true financial condition of the firm. They were informed that a report Mr. Ahmed had prepared valued the business at $47.1 million without being given a copy or being told that the valuation was of BP Trade, not Success Trade, based on a series of unverified assumptions regarding its cash flow. To the contrary, investors were given the incorrect impression that the report and its valuation number took into consideration the actual financial condition of Success Trade. Investors were also given the false impression that the firm’s stock would be listed on a European exchange in the immediate future.
The note offering was not registered or exempt from registration. While the firm filed a Form D Note of Exempt Offering with the SEC claiming the offering was exempt under Rule 505, in fact it was not, according to the Order. Under that provision the offering cannot include more than 35 non-accredited investors or any investors who are both non-accredited and unsophisticated. The Success Trade offering did not meet the requirements of the Rule.
The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). Respondents resolved the action, consenting to the entry of a cease and desist order based on the Sections cited in the Order. They also agreed to pay, on a joint and several basis, disgorgement of $12,777,395.80 and prejudgment interest. Respondents will, in addition, pay on a jointly and severally, a penalty of $12,777,395.80. Additional proceedings will be held to determine if a bar order as to Mr. Ahmed is appropriate.
Previously, a FINRA hearing panel issued an order expelling Success Trade from membership, barring Mr. Ahmed from association with any FINRA member firm and requiring him and his firm, jointly and severally, to pay investor restitution and prejudgment interest of $13,706,288.28. The order, dated June 25, 2014 was based on the Success Trade note offering. It is on appeal.
In February 2015 the District of Columbia’s Department of Insurance, Securities and Banking entered a cease and desist order against the firm and Mr. Ahmed based on the note offering. The order also prohibits them from engaging in the securities business in the District of Columbia and directs, on a joint and several basis, the payment of investor restitution of $12,529,804.34 and a penalty of $650,000.