On March 11, 2013, the Securities and Exchange Commission announced charges against New York-based private equity firm Ranieri Partners, a former senior executive, and an unregistered broker who violated securities laws when soliciting more than $500 million in capital commitments for private funds managed by the firm.
The federal securities laws require that an individual who solicits investments in return for transaction-based compensation be registered as a broker. An SEC investigation found that William M. Stephens of Hinsdale, Ill., solicited investors as a hired consultant for Ranieri Partners and was paid fees by the firm, but never registered as a broker. Stephens’ longtime friend Donald W. Phillips, a senior managing director who headed up capital raising efforts for Ranieri Partners, was responsible for overseeing Stephens’ activities as a purported “finder” who would merely make initial introductions to potential investors. But Stephens’ role went far beyond that of a finder. He consistently communicated with prospective investors and their advisors and provided them with key investment documentation that he received from Ranieri Partners.
The Charges
Ranieri Partners, Phillips, and Stephens agreed to settle the SEC’s charges.
“Registered brokers are subject to SEC oversight and examinations in order to monitor their conduct and protect the interests of investors,” said Merri Jo Gillette, director of the SEC’s Chicago Regional Office. “Investors in Ranieri Partners’ funds were denied these protections because Stephens acted outside the boundaries of the law, and Phillips and the firm ignored the essence of his activities.”
According to the SEC’s orders instituting settled administrative and cease-and-desist proceedings, Stephens engaged in the business of effecting transactions in securities in several ways despite not being registered as a broker or affiliated with a registered broker-dealer. Stephens sent private placement memoranda, subscription documents, and due diligence materials to potential investors, and urged at least one investor to consider adjusting portfolio allocations to accommodate an investment with Ranieri Partners. Stephens provided potential investors with his analysis of the strategy and performance track record for Ranieri Partners’ funds, and also provided confidential information identifying other investors and their capital commitments. The SEC charged Stephens with violating Section 15(a) of the Securities Exchange Act, which requires people acting as brokers to be registered with the SEC.
The SEC’s order against Phillips and Ranieri Partners found that Phillips, who lives in Barrington, Ill., aided and abetted Stephens’ violations by providing Stephens with key fund documents and information while ignoring red flags indicating that Stephens had gone well beyond the limited role of a finder and was actively soliciting investments. The order found that Ranieri Partners caused Stephens’ violations.
The Settlement
In settling the SEC’s charges, Ranieri Partners agreed to pay a penalty of $375,000, Phillips agreed to pay a penalty of $75,000, and Stephens agreed to be barred from the securities industry. The SEC’s orders require each of them to cease-and-desist from further violations of Section 15(a). The SEC also suspended Phillips from acting in a supervisory capacity at an investment adviser or broker-dealer for nine months. Ranieri Partners, Phillips and Stephens consented to the entry of the SEC’s orders without admitting or denying the findings.
The SEC’s investigation was conducted by Jason Howard, Steven Klawans and John Sikora, Jr., in the Chicago Regional Office with assistance from examiners John Brodersen and Eric Donofrio.
Industry Reaction
We heard from Attorney Jennifer Moseley on her thoughts regarding the similarities and applicability of this action to EB-5: 
1. It's important to note that Ranieri Partners hired Stephens as an independent "consultant." In the EB-5 context, there are some who seem to think that entering into arrangements as or with a "consultant" means that they are presumed to not be broker-dealers. This is far from the case. Whether someone is a broker-dealer depends on the activities of the finder, and not on the title or name given to the finder. The SEC will evaluate the facts and circumstances to determine whether someone, regardless of whether they were hired as a consultant, should've been registered as a broker-dealer.
2. Stephens considered himself a "finder" who merely made initial introductions to potential investors. However, Stephens distributed offering documents directly to the potential investors and communicated with them and their advisors. Many EB-5 "middle men" do exactly this – they have conversations with potential investors or the agents and forward documents directly to them, as opposed to the regional center or issuer distributing the documents. The SEC specifically noted that this went "far beyond that of a finder." In other words, Stephens should've been registered with the SEC.
3. It is important to note that the SEC brought charges against the firm (Ranieri Partners) and a principal of the firm (Phillips) because they paid an unregistered broker, on the charge that they aided and abetted the unregistered broker-dealer's violations of securities laws. In other words, if a regional center/issuer pays an unregistered party that should've been registered, the regional center/issuer is in violation of securities laws, and the SEC can pursue both civil and criminal penalties. In addition, such a violation of securities laws gives the investors a right to rescind. Therefore, each EB-5 investor can demand that a regional center/issuer give them their money back if a regional center/issuer has paid an unregistered finder. If rescission claims are brought, not only does this create material, adverse consequences for that particular project, but future potential investors will be concerned about the regional center and unwilling to take the risk of putting their money there.
4. The reason registration is required is because (a) evaluating securities investments requires knowledge of the area, and registered broker-dealers have to pass an examination showing they are qualified to solicit, sell or otherwise deal in securities; and (b) it allows the SEC and FINRA to oversee and monitor the behavior of registered firms and people to ensure protection of the investor. Unregistered so-called "finders" are most often not qualified to participate in EB-5 securities transaction and are not answering to anyone so there is a greater risk of unscrupulous behavior.
- EB-5 securities can be susceptible to these issues because (a) many people don't think they are effectuating securities transactions, even though they are, because it happens in an immigration context; and (b) the agents who participate in EB-5 are not brokers or investment advisers and are motivated to send investors to the highest bidder for their fees. This means no one is doing the due diligence on the investor's behalf, although the investor may think that, because these middle men are getting paid, somebody is actually sifting through the information for them and providing them with information they need. The regional center/issuer must have a written agreement in place between it and any third parties acting on its behalf in order to ensure that the regional center is monitoring, to the extent possible, the activities of such parties. After all, it is the issuer's responsibility under securities laws.
- Particularly in light of the recent SEC claim against the Chicago regional center, these SEC charges against Phillips, Ranieri Partners and Stephens should be a wake-up call that investors are going to be more wary of dealing with regional centers who are not paying close attention to applicable securities laws.
Jennifer Mercier Moseley is a partner with attorneys Burr Forman in the Birmingham, AL office. Jennifer assists public and private companies with stock and asset purchases, stock-for-stock combinations, cash out mergers and tender and exchange offers. In addition, Jennifer represents regional centers with their formation, structure and securities offering matters, as well as companies seeking investment, in connection with the EB-5 visa regional center program under the USCIS rules and regulations.