WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that a FINRA hearing panel has expelled Plano, TX-based broker-dealer Red River Securities, LLC, barred its CEO Brian Keith Hardwick, and ordered the firm and Hardwick to jointly and severally pay $24.6 million in restitution to customers for fraudulent sales in five oil and gas joint ventures. The hearing panel found that the respondents engaged in a pattern of misrepresentations and omissions that spanned nearly four years and involved sales in the risky joint ventures. The hearing panel dismissed FINRA Department of Enforcement’s allegations that the firm sold interests in two of the joint venture offerings in violation of the general solicitation prohibition for the private placement of securities under Regulation D, one alleged misrepresentation charge, several alleged suitability violations by the firm, and additional suitability allegations against Hardwick. The decision resolves charges brought by FINRA's Department of Enforcement in July 2015.
The panel found that Red River Securities and Hardwick intentionally and fraudulently misrepresented and omitted material facts in connection with the sales of interests in oil and gas joint ventures issued by Regal Energy, LLC, a close affiliate of Red River Securities. The oil and gas offerings, which the panel noted were already high-risk ventures, misrepresented the amount of income distributed to investors in other Regal Entity joint ventures, failed to disclose material conflicts of interest, and failed to disclose that one of the wells was a “wildcat,” which carried risk in addition to the usual risks of oil and gas joint ventures. In addition, Red River Securities and Hardwick omitted material information about the sizable management fees that would be paid to the affiliated entity and failed to disclose Hardwick’s participation in drafting an independent geologist’s report.
In addition, the hearing panel held that the joint venture purchase was not suitable for two customers. One customer was a 74-year-old, self-employed farmer and dog breeder with a net worth of $2 million, liquidity of $20,000, and $150,000 in annual income. Given her level of liquidity and her self-employed/seasonal employment situation, the hearing panel found that her investment of $94,754, representing well over half of her annual income, in three risky oil and gas ventures in a period of a year, was not suitable.
The panel decision also characterized Red River Securities and Hardwick’s misconduct as “egregious” and noted several aggravating factors, including the respondents’ “failure to develop and enforce a robust supervisory system” and “the extent of the respondents’ monetary gain,” including $3.6 million in due diligence fees and commissions from the five offerings, money earned as owners of Regal Entities, and management fees. Investors received total distributions of less than $500,000 from the more than $25 million they invested in the five offerings.
Unless the hearing panel's decision is appealed to FINRA's National Adjudicatory Council (NAC), or is called for review by the NAC, the hearing panel's decision becomes final after 45 days.
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