← Broker database 2024-10-21
Eric Steven Smith Barred and Ordered to Pay $130,000 Restitution for Fraudulent Misrepresentations
According to FINRA, Eric Steven Smith was barred from association with any FINRA member in all capacities and ordered to pay $130,000 plus prejudgment interest in restitution to investors on October 21, 2024, following a Securities and Exchange Commission decision.
The SEC sustained findings that Smith willfully violated Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and FINRA Rules 2020 and 2010 by fraudulently misrepresenting and omitting material facts in connection with the sale of securities. Smith engaged in acts of fraud over an extended period involving investors who lost the entirety of their investments.
Smith solicited a minimum of 15 people to invest in a bridge loan note offering; of those, four people invested $130,000 in the offering. Smith intentionally failed to disclose the critical fact that his member firm owed prior investors hundreds of thousands of dollars that it could not repay. Smith was desperate to raise funds for the firm, which was also struggling to pay its employees and remain viable. Smith knew or was reckless in not knowing that his representations about the firm's financial prospects were unfounded and would persuade investors to purchase the offering.
Smith continued to solicit investors when it was obvious that his claims in the offering materials touting a special purpose bank and purportedly pending engagements with a trust company and the city of Jacksonville, Florida, were false. When one investor requested a refund after not receiving documents related to his investment, Smith told the investor he had no present ability to refund his money and attempted to assuage the investor's concerns by claiming without support that the firm's assets far exceed its total debt.
Smith's fraudulent omissions and misrepresentations resulted in $130,000 in actual gain for Smith and the firm from sales to the investors. The findings also stated that Smith actively engaged in a multitude of activities as a principal and representative despite his lack of registration. Smith knew he was required to register as a principal to manage the firm's day-to-day securities business but claimed an exemption that was not applicable given his active involvement in firm management.
This case involves classic securities fraud—making material misrepresentations and omitting critical facts to induce investors to purchase securities. The fact that Smith failed to disclose that the firm owed hundreds of thousands of dollars to prior investors and could not repay them is an egregious omission. Investors had a right to know that their money would be used to try to keep a failing firm afloat rather than for the purposes described in the offering materials.
The promises of a special purpose bank and engagements with a trust company and the city of Jacksonville appear to have been fabrications designed to make the investment seem more attractive. When these promises turned out to be false, investors lost their money.
Smith's decision to appeal to the U.S. Court of Appeals for the Sixth Circuit demonstrates his continued refusal to accept responsibility for his fraud. The bar and restitution order remain in effect pending the appeal.
Investors should be extremely cautious about investing in securities offered by financially troubled firms. Before investing in any private placement or bridge loan offering, investors should conduct thorough due diligence, ask for audited financial statements, verify claims about pending business relationships, and consult with independent financial advisors.