May 10, 2017
The Financial Industry Regulatory Authority (FINRA) Department of Enforcement filed a Complaint against Arizona brokerage firm Scottsdale Capital Advisors Corporation (Scottsdale) for allegations of inappropriate business conduct. Scottsdale’s principal business is the deposit and liquidation of penny stocks, also called “microcap” securities, for its customers. FINRA also filed the Complaint against brokers John Hurry, D. Michael Cruz, and Timothy Diblasi as the alleged players in the scheme.
According to the nearly 150-page Complaint dated March 31, 2017, Scottsdale is not a registered brokerage firm and relies on the primary exemption Rule 144, a highly technical rule created by the Securities Exchange Commission that restricts some transactions and permits others that meet certain conditions.
According to the Complaint, Hurry and his wife established a brokerage firm in the Cayman Islands in 2013 to conduct high-risk foreign microcap stock liquidation. FINRA claims that Hurry appointed a separate entity director to avoid the appearance that he and his wife controlled the firm. The alleged scheme can be summarized accordingly: An individual would loan funds to an issuer of the microcap stock, which would then be converted to shares by a foreign entity. The shares were then deposited into an account at Scottsdale, liquidated, and the proceeds would be electronically transferred. Scottsdale liquidated over 74 million shares of microcap securities, generating over $1.7 million for Hurry’s brokerage firm.
As Scottsdale’s Chief Compliance Officer (CCO) currently and during the time period of the alleged misconduct, Diblasi allegedly violated NASD Rules 3010(a) and (b) and FINRA Rule 2010 by failing to establish and maintain a supervisory system, including written supervisory procedures, per Section 5 of the Securities Act. According to the Complaint, FINRA suspended Diblasi for two years, fined him $50,000, and ordered him to pay FINRA administrative and transcript fees totaling $22,124. FINRA also fined Scottsdale $1.5 million for allegedly violating FINRA Rule 2010 by selling securities unlawfully without registrations and exemption.
Cruz, who was Scottsdale’s president during the period of concern, allegedly violated NASD Rule 3010(b) and FINRA Rule 2010 by failing to supervise and appropriately respond to numerous red flags indicating unlawful unregistered distributions. FINRA issued the same suspension and monetary sanctions as it did for Diblasi. Cruz now serves as Hurry’s general counsel for all of his enterprises.
By engaging in activities designed to enable unlawful transactions and evading regulatory scrutiny, FINRA barred Hurry from associating with any FINRA member firm in all capacities for violating FINRA Rule 2010.
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