WestPark Capital Stockbroker’s Sale of Illiquid Promissory Notes Results in 15-Month Suspension
On September 7, 2020, Harry Seth Datys (CRD# 1877750) consented to sanctions by the Financial Industry Regulatory Authority (FINRA), including the imposition of a $20,000 administrative fine and a 15-month industry suspension from associating with any FINRA members. Mr. Datys—without admitting or denying any wrongdoing—entered into a Letter of Acceptance, Waiver and Consent (AWC) with FINRA concerning his purported recommendation of “promissory notes issued by his member firm’s parent company to customers” without a reasonable basis for making such recommendations.
According to the AWC, Mr. Datys, who is a longtime stockbroker with nearly three decades of industry experience, “offered and sold 24 promissory notes issued by WestPark Capital Inc.’s parent company” to numerous customers. According to FINRA’s findings of fact, Mr. Datys allegedly raised in excess of $2.7 million on the sale of certain promissory notes and received commissions of $183,000. From 2005 until his suspension, which began on September 8, 2020, Mr. Datys was affiliated with WestPark Capital Inc. (WestPark) in that firm’s New York City office. According to FINRA BrokerCheck, Mr. Datys has been named or otherwise involved in a total of 15 customer disputes over the course of his career, including eight disputes which resulted in a settlement.
As set forth in the AWC, Mr. Datys allegedly failed to conduct adequate due diligence on the promissory notes as offered by WestPark. Specifically, FINRA found that the offering documents allegedly included a subscription agreement and financial statements which “contained red flags about the company’s ability to repay the notes.” As set forth in the AWC, Mr. Datys allegedly “failed to investigate the current status of a $1 million line of credit that the company had with a bank” which had defaulted. In addition, Mr. Datys allegedly emailed certain customers a purportedly false “historical analysis that he obtained from the CEO” without disclosing that the information provided was hypothetical rather than an actual historical analysis.
Promissory notes are illiquid, complex, and often fraught with risk. They are best categorized as alternative investments offered as unregistered securities through private placements. The majority of private placements are offered under an exemption from the registration requirements for securities known as SEC Regulation D (“Reg D”). Among other things, Reg D provides a safe-harbor exemption to the requirement for securities registration, and further specifies the amount of money that can be raised in an offering, as well as the type of investor (typically, accredited investors) who may be solicited to invest in such non-public offerings.
Investing in private placements is risky. To begin, investors typically only receive limited information about the underlying company or business operations. Often, investors will only receive a Private Placement Memorandum (PPM) or other limited offering documents, and perhaps unaudited financials. Under prevailing securities rules, as set forth by both the SEC and FINRA, a brokerage firm is obligated to conduct due diligence on any investment before it is recommended, in order to understand the investment and its risk components, as well as to ascertain any red flags. By extension, and as part of this due diligence requirement, a broker-dealer and financial advisor must make reasonable efforts to gather and analyze information about the investment product, including the issuer, its management, financial condition, the intended use of proceeds for the offering, and the like. In instances where a brokerage firm and/or financial advisor fail to conduct adequate due diligence, then they may be held liable for losses suffered by investors.
The attorneys at Giarrusso Law Group LLC have significant experience in working closely with investors to resolve all manner of issues concerning investment losses, including losses suffered due to a financial advisor’s negligence or misconduct. Investors may pursue a claim to recover monies through securities arbitration before FINRA, or in some instances, through litigation. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.