At the end of last week, we received our second[1] decisive win in a FINRA Enforcement case in a matter of days. Following a two-day hearing back in July, the hearing Panel dismissed all charges against our clients Paul J. McIntyre and MSC-BD, LLC. While any victory is nice, and doing justice for a client who always viewed these allegations as meritless is rewarding, this success was even sweeter because of the completeness of the victory: the Panel found that Enforcement did not provide evidence to support any elements that formed the basis of its claims.

Enforcement alleged that McIntyre and MSC had drafted and distributed a fraudulent private placement memorandum (“PPM”) to potential investors to raise money to acquire and build a marina in Fort Myers, Florida. McIntyre had previously been involved in raising money for the same marina project when the marina owner defaulted on its mortgage, refused to repay investors, and declared bankruptcy. With the interests of those initial investors in mind, McIntyre spent thousands of hours of his time trying to purchase the marina from the bank in order to complete construction and earn a profit for investors, as well as litigating against the first mortgager on the property who had personally guaranteed the investors’ investments.

Despite McIntyre’s considerable efforts to help the investors, Enforcement tried to paint him as a fraudster, who was actually misleading investors to his own benefit. Enforcement even went so far as to allege that McIntyre acted with scienter, or fraudulent intent, when compiling and circulating the PPM to raise money for the project. The tragedy is that Enforcement never had any evidence to support such harsh allegations in the first place, and probably should have never brought them.

Happily, the Panel quickly figured this out: “Enforcement offered no evidence whatsoever that [McIntyre] intended to omit material information from the PPMs or mislead…investors…. On the contrary, as explained above, before making the PPM available to investors, [McIntyre] circulated drafts widely, seeking comments and proposed revisions to improve the document.” Furthermore, the Panel found that McIntyre did not even act recklessly or negligently. Rather, McIntyre “acted in good faith in promulgating the PPM” since he circulated it for comment to three attorneys, prior investors, broker-dealers, and a third-party due diligence company before he ever distributed it to potential investors.

Besides coming nowhere close to proving that McIntyre acted with scienter, Enforcement also failed to demonstrate that the PPM contained any material misrepresentations or omissions. In fact, the Panel found that there were such “extensive disclosures in the PPM” that any additional disclosures that Enforcement thought should have been included were not necessary because they “would [not] have been material to a reasonable investor.” In other words, McIntyre did such a thorough job of disclosing facts about his involvement in the first marina offering and his compensation for his involvement in the project that additional disclosures would not have “significantly altered the total mix of information available to…investors.”

Perhaps the most puzzling allegation was that the PPM failed to disclose the true purpose for which the offering proceeds would be used. Specifically, Enforcement alleged that the purpose of the offering as stated in the PPM – to purchase the marina and resume construction – was false, and that the real (but unstated) purpose was actually to raise money to fund litigation against the guarantors of the first offering.

The problem with this allegation is that it ignored some obvious – and unrebutted – facts. It ignored that the McIntyre entered into a contract with the bank to purchase the marina, and a contract with a construction company to resume construction. Neither would make sense if the true goal was to simply raise money to litigate? And why would the offering attempt to raise over $10 million if the anticipated legal expenses to fund litigation were only $300,000? While Enforcement may have ignored these obvious facts in a strained effort to paint McIntyre as a fraudster, the Panel did not.

In addition to dismissing all of the allegations that McIntyre or MSC-BD mispresented or omitted material information in the PPM, the Panel also dismissed the allegation that McIntyre violated FINRA Rule 2010 by returning funds to one investor. “The Panel conclude[d] that [McIntyre] had authority under the provisions of the PPMs and the Operating Agreement to make that decision.” Again, the Panel made this determination based on the plain language of the PPM, which was available to Enforcement when it decided to bring these allegations.

I suppose it is Enforcement’s job to be skeptical. When faced with conflicting facts or inconsistent stories among witnesses, that’s fine. But, this was a case where, when faced with unrebutted facts, Enforcement simply chose not to believe them. That may be acceptable when listening to Donald Trump on the campaign trail, but that should not be the standard for bringing regulatory actions that threaten to strip a registered rep of his license, his career, his livelihood and his reputation. Thankfully, the Panel heard the facts and reached the right decision: dismissal of all claims.

[1] Heidi VonderHeide blogged about that win here.