WestPark Capital, of Los Angeles California, and its CEO, Richard Rappaport, have been sanctioned and fined $280,000 collectively by the Financial Industry Regulatory Authority (“FINRA”) for misrepresentations, omissions, and supervisory failures regarding the sale of promissory notes in WestPark’s parent company, WestPark Capital Financial Services (“WPCFS”). FINRA has also suspended Rappaport from the securities industry for his wrongdoing.
As previously covered in this space, WestPark has prior run-ins with FINRA regulators and has racked up numerous customer complaints. In fact, the firm’s status as employer of 35 registered representatives who had been associated with one or more disciplined firms in a registered capacity within the previous three years associated with the firm, placed WestPark under heightened obligations to record its representatives’ phone calls with customers. FINRA found that WestPark violated its “Taping Rule” and sanctioned the firm for this misconduct.
WESTPARK AND RAPPAPORT BACKGROUND
WestPark has been a FINRA member since 1996. It is an investment banking and full-service securities brokerage firm with approximately 60 registered representatives, a main office in Los Angeles, California, and approximately 8 branch offices. The firm is majority-owned by WPCFS, which in tum was majority-owned by Rappaport until at least January 2018.
FINRA’S FINDINGS AGAINST WESTPARK AND RAPPAPORT
FINRA found that, between January 2012 and January 2018, WestPark sold 33 promissory notes issued by WPCFS, to 21 customers, raising a total of $3.9 million.
According to FINRA, the firm made negligent misrepresentations and omissions of material facts to the customers in connection with the sale of the WPCFS Offerings. FINRA also found that Rappaport violated made misrepresentations and omissions concerning the WPCFS Offerings.
FINRA found that the firm provided investors with offering documents, which were approved by Rappaport, that contained material misrepresentations and omitted material facts. For example, the offering documents stated that WPCFS had a $1 million line of credit with a bank and that WPCFS was not in default on any “agreement or instrument material to its business.” However, the offering documents failed to disclose that WPCFS had defaulted on the line of credit and had defaulted on successive forbearance agreements with the bank, or that the bank had sued WPCFS and Rappaport. Similarly, the offering documents failed to disclose that WPCFS had net operating losses each year from 2012 through 2016.
WestPark also sent at least nine prospective investors a misleading “Historical Analysis” document. The Historical Analysis document, which Rappaport created and sent to at least three of the nine prospective investors, claimed to show investors what they would have received as a return on the notes if the notes had been purchased in 2006 and held through 2010. In fact, the return displayed was hypothetical. For example, the document represented that a $2 million investment in the notes made between 2006 and 2010 would have returned over $9 million. However, the document did not explain that this calculation was based on hypothetical returns from distinct investments and not any actual return from the notes.
FINRA further found that Westpark, through Rappaport and other firm representatives, represented to prospective investors that they would be entitled to share in pro-rata distributions of equity and profits from Westpark. In fact, the noteholders were entitled to share in pro rata distributions of equity and profits from WPCFS, not Westpark, which at times had higher profits and greater equity-producing opportunities than WPCFS.
Finally, FINRA found that, WestPark through Rappaport and other firm representatives, failed to disclose material conflicts of interest. For example, at certain times, WPCFS’s primary source of revenue was distributions from its subsidiaries. Westpark and Rappaport, however, failed to disclose to prospective investors that Rappaport had sole discretion as to whether WPCFS’s subsidiaries would make distributions to the parent. Indeed, Rappaport negotiated the amount of equity WPCFS would retain from its investment banking transactions and had the ability to waive WPCFS’s right to retain equity in a transaction.
Based on its findings, FINRA deemed WestPark and Rappaport to be in violation of Section 17(a)(2) and (3) of the Securities Act, which provides, in pertinent part: “It shall be unlawful for any person in the offer or sale of any securities . . by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly: . . . (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.”
Likewise, FINRA held that WestPark and Rappaport violated FINRA Rule 2010, which requires that FINRA members and associated persons observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.
WestPark and Rappaport were also sanctioned for their failure to reasonably supervise the registered representatives soliciting investments in the WPCFS Offerings. Rappaport was deemed responsible for the final approval of the offering documents and was the designated supervisor with respect to WestPark’s private placement business.
WESTPARK’S VIOLATIONS OF THE TAPING RULE
In July 2019, WestPark became subject to the requirements of FINRA Rule 3170 (the “Taping Rule”), after 35 registered representatives who had been associated with one or more disciplined firms in a registered capacity within the previous three years associated with the firm.
The Taping Rule requires firms, among other things, to establish, maintain, and enforce special written procedures to record “all telephone conversations between [its] registered persons and both existing and potential customers and [to review] the tape recordings to ensure compliance with applicable securities laws and regulations and applicable FINRA rules.”
FINRA found that the firm’s special written procedures in effect from July 2019 were not reasonably designed to comply with the Taping Rule, and the firm failed to record all conversations as required under the Taping Rule. As a result, FINRA sanctioned WestPark for violations of FINRA Rules 3170 and 2010.
FINRA’s SANCTIONS AGAINST WESTPARK AND RAPPAPORT
Based on its findings, FINRA sanctioned WestPark with a censure; a $250,000 fine; required an offer of rescission to the holders of the 19 notes, and imposed on WestPark an undertaking to review and revise, as necessary the firm’s policies, procedures, processes, controls, and systems concerning the Taping Rule.
FINRA imposed on Rappaport sanctions including a four-month suspension from associating with any FINRA member in all capacities; a 15-month suspension from associating with any FINRA member in all principal capacities, to run concurrently; and a $30,000 fine.