Axiom Capital Mangement, Inc.
The United States Securities and Exchange Commission (SEC), September 22, 2008, filed a civil complaint in the United States District Court for the Southern District of Florida, against former Axiom Capital Management, Inc. (Axiom) registered representative, Gary J. Gross The Complaint alleged that from early 2004 through approximately September 2006, Gross defrauded several of his customers by
- making material misrepresentations and omissions about the risks and suitability of securities he bought for them,
- churning customer accounts, and
- fabricating customer account values.
When Gross reaped more than $700,000 in ill-gotten gains, his customers lost more than $2.7 million. Many of Gross’ customers often were elderly, unsophisticated investors, who wanted only to preserve their principal and grow their portfolio while investing with minimal risk.
Among the allegations, the SEC particularly focused on Gross’ playing up the profit potential of various private placements and investments known as PIPEs (private investments in public equities) to his customers. Gross told his customers the private placements and PIPEs were riskless and the issuers were high-quality companies. Gross promised some customers they would be able to sell these investments within months and reap large profits. Gross failed to disclose the risks accompanying these investments.
Contrary to Gross’s representations, the PIPEs transactions he was pushing involved start-up ventures in search of funding, with little or no track record. Gross also did not tell customers they would receive restricted stock they could not trade until the issuers’ registration statements were declared effective. Additionally, Gross did not tell his customers that the issuers’ registration statements could be delayed, and that customers would consequently be unable to convert their restricted shares into free-trading common stock within the time Gross promised.
When hiring Gross, Axiom established its first branch office in Boca Raton, Florida. The office was staffed primarily by Gross, his branch manager David A. Siegel, and a sales assistant. However, Gross arrived at Axiom in December 2002 as damaged goods, due to customer complaints about Gross at previous firms. In fact, the State of Florida required, among other things, that Axiom place Gross on strict supervision (under which he remained until terminated in January 2007).
In May 2003, Axiom hired Siegel as branch manager for its Boca Raton branch office and to supervise Gross. Siegel’s compensation was based on commissions he generated from his own customers and a two percent he received of the branch office’s net commissions.
The SEC alleges that Branch Manger Siegel failed reasonably to supervise Gross by failing to follow both Axiom’s written supervisory procedures manual and an internal Axiom memorandum entitled “Heightened Supervision of Gary Gross.” As a consequence, the SEC alleges that Siegel failed to notice on numerous occasions when several of Gross’ customers entered unsolicited orders to purchase or sell the same securities, often on the same day. Further alleged, is that Siegel also failed to regularly use the firm’s monthly Active Account Report, review monthly customer account statements, or take other reasonable action to monitor for churning by Gross. The SEC’s final shot is the allegation that Siegel profited from Gross’ violations of the federal securities laws in the form of commissions he received based on Gross’ commissions.
On November 25, 2008, the United States District Court for the Southern District of Florida entered a judgment by consent against former Axiom Capital Management, Inc. registered representative Gary J. Gross.
- permanently enjoining him from violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Exchange Act,
- ordering him to pay disgorgement and a civil penalty pursuant to Section 20(d) of the Securities Act and Section 21(d) of the Exchange Act, and
- barring him from participating in an offering of penny stock as defined by Exchange Act Rule 3a51-1.
Pursuant to an offer of settlement from Gross in which he was barred from association with any broker, dealer, or investment adviser, the Securities and Exchange Commission entered an Order Instituting Public Administrative Proceedings and Imposed Remedial Sanctions.
Besides going after Branch Manager Siegel, the SEC proposed to proceed against Axiom, citing the firm’s failure reasonably to supervise Gross in connection with his sale of private placement offerings and private issuances of public entities (PIPEs) (collectively “private placements”), from approximately January 2005 through at least September 2006. The SEC alleged that Axiom failed reasonably to supervise Gross because it failed to devise a reasonable system to implement the firm’s policies and procedures regarding review for suitability of private placement investments and review of subsequent transactions to determine suitability of the transaction in light of the customer’s current holdings.
Two years after Gross settled with the SEC, Axiom submitted an Offer of Settlement.
The SEC determined that Axiom’s written supervisory procedures manual (“WSP”) required the registered representative to determine whether a private placement was a suitable investment to recommend to a customer; however, it failed to provide a clear mechanism for supervisory oversight of these determinations. Elsewhere, the WSP provided that the supervisor was responsible for reviewing transactions for suitability “where appropriate,” but failed to define appropriate circumstances for this suitability review.
In settling with the SEC, Axiom agreed to several undertakings. The firm will retain an Independent Consultant to (i) review Axiom’s written supervisory policies and procedures concerning suitability review of private placements; and (ii) review Axiom’s systems to implement its written supervisory policies and procedures concerning suitability review of private placements and suitability reviews subsequent to the purchase of a private placement.The Independent Consultant is required upon concluding the review (or within 120 days at the most) to submit a report to Axiom and the SEC in which the supervisory issues noted are addressed through recommended changes or improvements to policies, procedures, and practices. It is anticipated that Axiom will adopt, implement, and maintain such recommendations or reach a mutual resolution of any disputes with the Independent Consultant. Finally, pursuant to Axiom’s Offer of Settlement, the SEC imposed a Censure and a $60,000 civil penalty.
If you feel you are a victim of these alleged fraudulent schemes of Gary J. Gross and/or Axiom Capital Mangement, Inc., call a Securities arbitration lawyer for a free consultation on how to recover your losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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