The Financial Industry Regulatory Authority said Tuesday that it expelled Red River Securities from the industry and barred CEO Brian Keith Hardwick; the parties also must pay $24.6 million to clients for fraudulent sales of interests in five oil and gas ventures.
FINRA’s hearing panel found Hardwick and others at Red River misrepresented and omitted information regarding the investments for about four years and that their actions “involved sales in the risky joint ventures.”
The panel characterized Red River Securities and Hardwick’s misconduct as “egregious.” It noted, for instance, the they failed to have a robust supervisory system for offerings in the “high-risk ventures” but did produce substantial monetary gain for themselves.
The group received $3.6 million in due diligence fees and commissions from five offerings, along with management fees and money earned through its ownership of affiliate Regal Energy. Investors, however, received less than $500,000 from the over $25 million they paid for the offerings.
Specific sales to two clients were described in detail as being unsuitable. In one case, the investor was a 74-year-old, self-employed farmer and dog breeder with a net worth of $2 million, liquidity of $20,000, and $150,000 in annual income.
“Given her level of liquidity and her self-employed/seasonal employment situation, the hearing panel found that her investment of $94,754, representing well over half of her annual income, in three risky oil and gas ventures in a period of a year, was not suitable,” the regulatory group explained.
As part of its findings, the panel dismissed claims that the firm had sold interests in two joint ventures in violation of Regulation D, which generally lets smaller companies raise capital via the sale of equity or debt securities without having to register the securities with the SEC.
It did note that Red River and Hardwick “misrepresented the amount of income distributed to investors in other Regal joint ventures, failed to disclose material conflicts of interest and failed to disclose that one of the wells was a ‘wildcat,’ which carried risk in addition to the usual risks of oil and gas joint ventures.”
Other omissions included details regarding the “sizable management fees” to be paid to Regal and Hardwick’s participation in the draft of “an independent geologist’s report,” FINRA said.
The hearing panel’s decision can be appealed or called for review over the next 45 days; otherwise it will become final. (Calls to Red River and Regal were not returned as of presstime.)
According to FINRA BrokerCheck records, Red River was fined $5,000 in 2011 for sales of private placements in 2010 that took place after a state regulator issued a cease and desist order meant to stop the group from sales of unregistered securities.
FINRA brought more charges against the firm in 2013 concerning misrepresentations and omissions of information tied to the sales of interests in oil and gas joint ventures.