An extended hearing panel charged with investigating allegations that Scottsdale Capital Advisors Corp. (Scottsdale, Arizona) and three top associates engaged in $1.7 million-worth of illegal microcap transactions ordered the firm to pay a $1.5 million fine, while barring former broker John Joseph Hurry, and issuing suspensions to former Scottsdale Capital President Darrel Michael Cruz and Chief Compliance Officer Timothy Brian DiBlasi. FINRA also ordered Cruz and DiBlasi to each pay a $50,000 fine.
FINRA found that all parties' violations—Scottsdale Capital, Hurt, DiBlasi, and Cruz—were "egregious," noting that Hurry specifically "is a threat to investors and the integrity of the markets." FINRA also wrote that Scottsdale Capital Advisors, as a firm, institutionalized the misconduct "as its standard way of doing business," which principally entails the deposit and liquidation of penny stocks.
For instance, the hearing panel wrote that "a large number of discrepancies and suspicious circumstances [indicated] that sham transactions, false documents, and nominees were being used to evade the securities laws and effect unlawful securities sales without registration. These red flags ought to have been investigated and appropriately resolved before the securities could be sold. The Firm, however, blinded itself to the multiple red flags signaling that the transactions were unlawful public distributions of securities."
The saga began with FINRA filing a 2015 complaint against Scottsdale Capital Advisors, Hurry, DiBlasi, and Cruz for allegedly helping a Cayman Islands broker-dealer generate over $1.7 million in proceeds from illegal penny stock sales resulting from the illicit liquidation of over 74 million shares of penny stocks issued by three little-known companies: Neuro-Hitech, Inc. (NHPI), VoipPal.com (VPLM), and Orofino Gold Corp. (ORFG).
FINRA discovered potential misconduct when the Cayman Islands firm, Cayman Securities Clearing and Trading SECZ, Ltd. (CSCT), deposited millions of the three issuers' shares in Scottsdale for resale, where they were cleared by Scottsdale Capital's clearing firm, Alpine Securities Corporation, and subsequently sold into the US securities market without registration.
Investigators wrote that Hurry (CRD #2146449) established, owned, directed, and controlled CSCT for the purpose of transacting high-risk foreign microchip stock liquidations due, in part, to Cayman Islands' laws that exempted Hurry's securities business from certain regulations while shielding customer identities from disclosure. Hurry also purportedly owns Scottsdale Capital's clearing firm, Alpine Securities Corporation, and Hurry along with his wife, Justine Hurry, indirectly own Scottsdale Capital through these and other entities they own and control.
FINRA charged former Scottsdale CCO DiBlasi (CRD #4623652) with failing to establish and maintain adequate supervisory systems, such as written supervisory procedures, related to sales of unregistered shares of microcap stocks, and charged ex-President Cruz (CRD #2450344) with failing to conduct reasonable inquiries into the illegal sales of the aforementioned microcap stocks despite red flags that should have alerted Cruz to the potentially illegal, unethical, and/or illicit conduct.
SEC Rule 144 pertains to unregistered, restricted, or hold-control securities, and requires firms to obtain an exemption from the SEC's registration requirements in order to sell these products in a public marketplace. According to the SEC, two Scottsdale Capital representatives were named in a 2011 complaint involving Rule 144 violations relative to convertible notes in the furtherance of a pump-and-dump scheme, while three separate 2013 SEC complaints charged Scottsdale Capital and/or its registered representatives with similar violations.
In 2016, Scottsdale Capital Advisors sued FINRA in an attempt to force regulators to drop the investigation, alleging that FINRA lacked jurisdiction and enforcement authority over the purportedly illegal offshore penny stock transactions. Scottsdale Capital's suit only challenged "FINRA's statutory authority to bring the case and not its factual findings or its interpretation of a securities law."
Scottsdale Capital also attempted to argue that the SEC complaints, as well as several actions filed against individuals and entities with whom the firm did business with (e.g., a concurrent securities fraud, tax fraud, and money-laundering conspiracy indictment), were not relevant to the case at hand because they dealt with classic pump-and-dump fraud, while the FINRA investigation did not charge Scottsdale Capital with pump-and-dump fraud. FINRA rejected the argument, finding Scottsdale's argument as an "attempt to brush aside the SEC complaints."
Despite the federal lawsuit, FINRA pressed on and has now imposed discipline on Scottsdale Capital, Hurry, DiBlasi, and Cruz for various violations of securities regulations related to the penny stock transactions.
Specifically, FINRA imposed a $1.5 million on Scottsdale Capital for "woefully lacking" compliance and supervisory procedures and for "institutionalization of the misconduct as its standard way of doing business."
FINRA barred Hurry for "purposeful and egregious" violations of FINRA regulations, repeatedly providing false testimony, and for deliberately effecting a nefarious microcap securities liquidation scheme while deliberately attempting to evade the law and regulatory requirements.
In suspending and fining Cruz, FINRA wrote that, as Scottsdale Capital's former President and a lawyer himself with a considerable background in securities laws, Cruz committed an "egregious" violation in failing to recognize and/or appropriately address multiple red flags, knowing that he was "critical to the firm's performance of its gatekeeping duty" as the firm's principal who gave final approval to such transactions, and served as someone whom "everyone else depended upon for [regulatory] compliance."
In suspending and fining DiBlasi, FINRA wrote that his egregious violation came with aggravating factors: Investigators wrote that DiBlasi as CCO was responsible for Scottsdale Capital's deficient written supervisory procedures, that these WSPs created the appearance of a set of procedures designed to achieve compliance when they in fact did not accurately reflect the firm's way of conducting business, and that the deficiencies resulted in violations and hindered regulatory efforts to determine the persons responsible for those violations. DiBlasi, meanwhile, allegedly maintained that his responsibilities did not extend to the firm's restricted and unregistered securities business.
If you have invested with Scottsdale Capital Advisors Corp, with former firm registrants John Joseph Hurry, Darrel Michael Cruz, Timothy Brian DiBlasi, or with any broker or financial adviser whose improper or illegal sales of unregistered penny stocks or other restricted products has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.