According to FINRA, Sanjay Bhargava was fined $5,000 and suspended for three months for participating in private securities transactions away from his member firm without disclosure.
Bhargava played a role in establishing a relationship between a real estate company specializing in preserving and operating historic real estate and another registered representative at his firm. The other representative established a limited liability company to pool investment funds to invest in a private placement offering issued by the real estate company. The offering related to a hotel and offered the possibility of tax credits for qualifying investors.
Bhargava communicated with the real estate company regarding the offering and discussed how investors in the other representative's LLC would become investors in the offering. He forwarded offering documents for the LLC to six individuals, none of whom were firm customers. These individuals ultimately invested $341,250 in the LLC. While Bhargava did not receive compensation related to the LLC or offering, his participation in these activities without firm disclosure violated FINRA rules.
Additionally, Bhargava misrepresented to the firm in an annual compliance attestation that he did not engage in any private securities transactions. This false attestation compounds the violation by demonstrating intentional concealment rather than inadvertent failure to disclose.
Private securities transactions, also known as "selling away," must be disclosed to firms even when the representative receives no compensation. Firms need to supervise these transactions to ensure they are legitimate and appropriate. Bhargava's participation in setting up the relationship, communicating about the offering, and forwarding offering documents constituted participation in private securities transactions that required disclosure.
The fact that the six individuals who received the offering documents were not firm customers doesn't eliminate the disclosure requirement. Representatives must disclose their participation in securities transactions regardless of whether those transactions involve their own customers. The disclosure allows firms to evaluate whether the activity creates conflicts, involves fraudulent investments, or otherwise raises concerns.
For investors, this case illustrates that private securities transactions can involve legitimate investments, like this historic hotel offering tax credits, but still violate rules when not properly disclosed. The violations occur because lack of disclosure prevents firms from supervising the transactions and protecting investors. Investors should conduct all securities transactions through their representative's registered firm, not through separate arrangements. The suspension is in effect from June 6, 2022, through September 5, 2022.
