The Financial Industry Regulatory Authority (FINRA) recently suspended and fined Advisor Thomas Mikolasko, (Mikolasko) of HFP Capital Markets LLC (HFP). According to FINRA Mikolasko made material misrepresentations and ommissions of material fact in connection with $3 million in Senior Secured Zero Coupon Notes sold to 58 customers of HFP for Metals Millings and Mining LLC (“MMM”) in a private placement offering.
MMM defaulted in repayment of the notes and investors lost principal and did not receive 100% of the return promised. FINRA also alleged that Mikolasko knew or should have known that HFP had conducted inadequate due diligence concerning the offering and that the limited due diligence the firm had conducted identified significant “red flags.”
Metals Millings and Mining LLC was an entity formed in 2009, to aggregate and process certain ore materials using “plasmafication.” According to FINRA, from December 2009 to February 201l, HFP sold approximately $3 million of MMM Notes to 58 HFP customers. The MMM notes provided for the repayment of principal in one year together with the ownership of ore concentrate.
MMM was obligated repurchase the ore from the investors at an agreed price so that they would receive a 100 percent return on their investment in addition to a return of principal. According to FINRA, MMM did not provide investors with a private placement memorandum fand provided investors with limited disclosures set forth in a subscription agreement.
FINRA alleged that HFP committed securities fraud and made misrepresentations and omissions of material information including that the ore concentrate that was to serve as collateral for the MMM notes. HFP misrepresented that the ownership of barrels of ore concentrate was going to be transferred to investors when, in fact, the ore was not transferred to investors. FINRA also found that the ore was relatively worthless despite MMM representations.
Additionally, conflicts of interests were not disclosed to investors.
All FINRA firms and brokers have an obligation to conduct due diligence prior to selling private placement offerings. FINRA found that HFP sold the MMM notes without having undertaken a reasonable investigation or conducting adequate due diligence. FINRA also concluded that the MMM notes were not reviewed or approved by HFP’s investment committee. HFP’s written supervisory procedures required the investment committee approval as a condition to its involvement in an offering.
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