June 29, 2009 (FinancialWire) — The following came to FinancialWire via Grand Rapids, Michigan-based law firm, Warner Norcross & Judd LLP.  More information about Warner Norcross & Judd  is available at the form’s web site (http://www.wnj.com/aboutus/overview/), and a copy of the SEC Order being referenced is available at the SEC web site (http://www.sec.gov/litigation/admin/2009/34-60149.pdf).

Last Friday, the SEC’s Enforcement Division publicly announced its settlement of an administrative proceeding against a small firm (Ram Capital Resources, LLC) and its two principals (Michael E. Fein, and Stephen E. Saltzstein) for acting as unregistered “brokers” and willfully violating the broker registration requirements under federal law with respect to their capital-raising intermediary activities between 2001 and 2005.  The two principals and their firm were actively involved in identifying and structuring private investments in public equity — commonly referred to as PIPEs.  These individuals and their firm were compensated based on a percentage of their capital raises and a significant share of warrants issued in the PIPE transactions.

Among other things, this proceeding is noteworthy in several respects:

The SEC describes the activities of the intermediaries as being: 1.) engaged in the business of identifying investors for PIPE offerings; 2.) sometimes referrals of potential PIPE transactions came to the intermediaries from, among others, PIPE issuers, registered broker-dealers acting as placement agents on behalf of the PIPE issuers, and interested investors: (a.) after identifying a PIPE offering or prospect, soliciting investors (a majority of which were hedge funds) to invest in the offering; and (b.) structuring PIPE offerings and negotiating the terms of such offerings with investors and issuers.

Specifically, the SEC’s order says:

While acting as an intermediary, Ram’s activities on certain occasions went beyond identifying potential PIPE opportunities for both issuers and investors. In connection with certain PIPE offerings, Ram also played a significant role in structuring, and negotiating the terms of, the PIPE offering. For example, Fein and Saltzstein often drafted and distributed to issuers and investors the initial term sheet outlining the terms of the PIPE offering.

Further, the SEC’s order says:

Ram also advised issuers and investors about the structure of the PIPE offering, including, for example, whether the offering should be structured as a convertible debt offering or a common stock offering. Ram continued to remain involved in the offering by negotiating the terms of the relevant documents, including the securities purchase agreement… (continued via the “Entire Article” link, below).

The SEC only brought administrative charges for violating the broker registration requirements of Section 15(b) of the Securities Exchange Act of 1934.  This is one of the few proceedings charging only a broker registration violation.  The SEC did not allege fraudulent or misleading conduct by the intermediaries.  In characterizing the violation as willful (which can carry a higher civil money penalty), the SEC said:

At some point during the relevant time period, Fein and Saltzstein knew or were reckless in not knowing that Ram’s compensation structure for its services required Ram to register as a broker-dealer. In fact, others in the industry questioned Fein about whether Ram should be registered based on the services Ram was providing and how it was compensated for such services.

There is no indication in the SEC’s order of how it became aware of these unregistered activities but there are several possibilities.  The securities issuers in these private offerings were publicly traded companies, subject to on-going SEC reporting.   The SEC has for several years been looking closely at PIPE transactions with respect to a number of potential concerns, including selective disclosure issues, so an SEC investigation into one or more PIPE transactions may have identified these intermediaries and their activities.  Company filings may have helped to identify these activities.  A registered broker-dealer might have complained about the competition.  Obviously, it took a while for the SEC’s enforcement attorneys to bring and resolve this case — the challenged activities occurred between 2001 to 2005.

The sanctions imposed under the settlement included disgorgement (likely their fees for deals during the four-year period), prejudgment interest, and civil money penalties that, in the aggregate, exceeded $1 million.  Each of the individuals was also subjected to a 12 month suspension from association with a registered broker-dealer (forced to sit out of this type of business activity for a year), which will be an on-going disclosure on their personal regulatory records if they later choose to become registered with a broker-dealer.

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