The Financial Industry Regulatory Authority (FINRA) has filed a complaint against Spartan Capital Securities, LLC, John Lowry, and Kim Monchik.

The Department of Enforcement alleges that between March 2021 and October 2021 (the “relevant period”), Spartan made 346 recommendations of securities that had a total principal value of over $24 million to 191 customers, the majority of whom were retail customers, through 16 private placement offerings.

Further, the Department alleges that Spartan lacked a reasonable basis to believe these recommendations were suitable or in the best interest of its customers because it failed to conduct reasonable due diligence on the Offerings. Spartan generated over $2.4 million in placement fees from these unsuitable recommendations.

The Complaint says that by failing to have a reasonable basis to recommend these investments, Spartan willfully violated Regulation Best Interest’s (“BI”) Care Obligation under Rule 15l-1(a)(1) of the Securities Exchange Act of 1934 (“Exchange Act”), and it violated FINRA Rules 2111 and 2010.

Respondent John Lowry, Spartan’s CEO and owner, was the sole owner and control person of the issuers of these Offerings, which were three unregistered, private investment funds (collectively, the “Atlas Funds”). Lowry also was the sole owner and control person of the entity that managed the Atlas Funds. Lowry approved and managed the Offerings on behalf of Atlas Funds, and he determined that Spartan would serve as the exclusive placement agent for the Offerings and retain a 10 percent placement fee.

Respondent Kim Monchik, Spartan’s CCO during the relevant period, assisted the Atlas Funds and Lowry with managing the Offerings, and she was responsible for, among other things, Spartan’s due diligence on the Offerings.

According to the complaint, in connection with the offer and sale of membership interests in Atlas Funds, the respondents recklessly or, at minimum, negligently disseminated, or caused the dissemination of, false and misleading information to Atlas Funds’ investors which violated FINRA Rule 2010, both independently and by virtue of acting in contravention of Sections 17(a)(2) and (3) of the Securities Act of 1933 (“Securities Act”).

Further, the respondents allegedly disseminated, or caused the dissemination of, false and misleading information to investors by repeatedly sending, or causing others to send, investors private placement memoranda (“PPMs”) and supplements to those PPMs that contained material misrepresentations about the markups charged to customers, the price the Atlas Funds paid to obtain membership interests in the private investment funds that purportedly held pre-IPO shares, and how Atlas Funds obtained membership interests in pre-IPO shares.

Specifically, the PPMs misrepresented that the Atlas Funds would not share in any profit on markups that may be charged by a third-party affiliate in the Offerings. In total, the Atlas Funds and its manager, at Lowry’s direction, charged customers $3.25 million in markups, which directly benefitted Lowry who owned and controlled those entities.

By misrepresenting that a third party had a role in the transactions and was charging the Atlas Funds (and the customer) a markup, and that Atlas Funds would not share in any of those markups, Respondents concealed Lowry’s additional compensation and the full extent of his economic self-interest in the Offerings. Respondents also created the false impression that the markup was justified because there was a third party that purportedly played a role in sourcing the investments for the Atlas Funds.

In addition to recommending and selling unsuitable and fraudulent investments, Spartan also allegedly violated its Disclosure Obligations under Regulation BI by failing to fully and fairly disclose in writing conflicts of interest associated with its recommendations of investments in the Offerings, including Lowry’s ownership of the Atlas Funds and economic incentive to have Spartan representatives recommend the private placements in the Offerings; and Monchik’s role with the Atlas Funds, including her responsibility for performing due diligence on the Offerings, first on behalf of Atlas, and then on behalf of Spartan, before Spartan representatives could recommend them to customers. As a result, Spartan is alleged to have willfully violated Exchange Act Rule 15l-1(a)(1), and it violated FINRA Rule 2010.

Finally, the complaint alleges that Spartan and Monchik, who, at all relevant times, was responsible for establishing, maintaining, and enforcing the firm’s supervisory systems, including its written supervisory procedures (WSPs), violated their obligations under Regulation BI and FINRA rules:

First, Spartan and Monchik failed to establish a supervisory system, including WSPs, reasonably designed to achieve compliance with the Care Obligation of Regulation BI as it relates to private placement offerings. Spartan and Monchik therefore violated FINRA Rules 3110(a) and (b) and 2010.

Spartan also allegedly failed to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with the Care Obligation of Regulation BI. As a result, Spartan willfully violated Exchange Act Rule 15l-1(a)(1) and violated FINRA Rule 2010.

Second, Spartan and Monchik failed to reasonably supervise the Offerings, including by failing to conduct reasonable due diligence on the Offerings, failing to maintain any records reflecting any due diligence that was completed on the Offerings, and failing to reasonably respond to red flags concerning the private investment funds’ ownership of the pre-IPO shares involved in the Offerings. As a result, Spartan and Monchik violated FINRA Rules 3110(a) and (b) and 2010.

Third, Spartan is alleged to have failed to establish written policies or procedures addressing the identification, disclosure, or mitigation of conflicts of interest, including any conflicts of interest arising from its recommendations of private placements issued by affiliated entities that Lowry established and controlled, i.e., the Atlas Funds, as required under Regulation BI’s Conflict of Interest Obligation. As a result, Spartan allegedly willfully violated Exchange Act Rule 15l-1(a)(1), and it violated FINRA Rules 3110(a) and (b) and 2010.

The Department of Enforcement requests that the Panel order that one or more of the sanctions provided under FINRA Rule 8310(a) be imposed, including that the respondents be required to disgorge fully any and all ill-gotten gains and/or make full and complete restitution, together with interest.