According to FINRA, Spartan Capital Securities, LLC, along with principals John Dennis Lowry and Kim Marie Monchik, were named as respondents in a FINRA complaint alleging willful violations of Regulation Best Interest, dissemination of false and misleading information in violation of the Securities Act of 1933, and supervisory failures.
The complaint alleges that the firm made recommendations of securities with a total principal value of over $24 million to 191 customers, the majority of whom were retail customers, through 16 private placement offerings. The firm, through Monchik, allegedly lacked a reasonable basis to believe these recommendations were suitable or in customers' best interests because it failed to conduct reasonable due diligence on the offerings. The firm allegedly generated over $2.4 million in placement fees from these unsuitable recommendations.
The complaint also alleges that in connection with the offer and sale of membership interests in three unregistered private investment funds (the Atlas Funds), the firm, Lowry, and Monchik recklessly or negligently disseminated false and misleading information to investors, violating Sections 17(a)(2) and (3) of the Securities Act of 1933.
Specifically, the private placement memoranda allegedly misrepresented that the Atlas Funds would not profit from any markup charged to customers in connection with their investments in the offerings. Further, supplements to the PPMs allegedly misrepresented the price at which the Atlas Funds purchased membership interests in pre-IPO shares and from which entity they acquired those interests.
These misrepresentations were allegedly material facts that a reasonable investor would have viewed as altering the total mix of information available. The firm, Lowry, and Monchik allegedly obtained money by means of the untrue statements when they raised capital from Atlas Fund investors and obtained placement fees, markups, and management fees.
In total, the Atlas Funds and its manager, at Lowry's alleged direction, charged customers $3.25 million in markups, which directly benefitted Lowry who allegedly owned and controlled those entities. This resulted in concealing Lowry's additional compensation and the full extent of his economic self-interest in the offerings.
The complaint further alleges that the firm willfully violated its disclosure obligations under Reg BI by failing to fully and fairly disclose in writing conflicts of interest associated with its recommendations. The offering documents allegedly did not disclose Lowry's ownership of the Atlas Funds and economic incentive to have firm representatives recommend the private placements, or Monchik's role managing the Atlas entities while performing due diligence on the offerings for both the Atlas Funds and the firm.
Additionally, the complaint alleges supervisory failures by the firm and Monchik, including failing to establish a supervisory system reasonably designed to achieve compliance with Reg BI's Care Obligation, failing to conduct reasonable due diligence, and failing to establish written conflict of interest procedures.
It is important to note that issuance of a complaint does not represent findings that allegations are true. The respondents are entitled to defend against these allegations. However, the scope and severity of the allegations—if proven—would represent serious violations harming investors.
