← Broker database 2021-11-22
WestPark Capital and Richard Rappaport Sanctioned for Negligent Misrepresentations in Parent Company Note Offerings
According to FINRA, WestPark Capital, Inc. and its principal Richard Alyn Rappaport were sanctioned for making negligent misrepresentations and material omissions when selling promissory notes issued by the firm's parent company to customers, violating Sections 17(a)(2) and (3) of the Securities Act of 1933.
The firm was fined $250,000, ordered to offer rescission totaling $1,777,316 to customers who invested in the notes, and must extend compliance with FINRA's "Taping Rule" for six additional months. Rappaport received a $30,000 fine and concurrent suspensions of four months in all capacities and 15 months in principal capacities. The violations involved offering documents that failed to disclose that the parent company had defaulted on a $1 million line of credit, violated forbearance agreements with a bank, faced a lawsuit from that bank, and suffered net operating losses from 2012 through 2016.
The firm also provided investors with a misleading historical analysis document created by Rappaport that purported to show returns investors would have received on the notes from 2006-2010. However, the document failed to explain that the calculations were based on hypothetical returns from different investments, not actual returns from the notes themselves. Additionally, firm representatives told prospective investors they would share in pro-rata distributions of equity and profits from the firm, when in reality the notes entitled holders to distributions from the parent company, which had lower profits and fewer equity-producing opportunities.
The firm and Rappaport also failed to disclose that Rappaport had sole discretion over whether subsidiaries would make distributions to the parent company—a material conflict of interest. Beyond the misrepresentations, FINRA found supervisory failures, as the firm did not properly train representatives about the notes and failed to respond reasonably to customer questions that raised red flags about misinformation.
The case also involved violations of FINRA Rule 3170 (the "Taping Rule"), as the firm's recording system allowed representatives to terminate recordings at their discretion, and the firm failed to detect that at least three recordings with noteholders were terminated before calls ended.
This case highlights the severe conflicts of interest when brokerage firms sell securities issued by their parent companies. Investors should be highly skeptical of such offerings, carefully review all disclosure documents for completeness, and verify claims about returns and distributions independently. Material omissions about financial distress, defaults, and lawsuits constitute fraud, even without explicit false statements. When firms have built-in conflicts like control over distributions, full disclosure is essential.