SharesPost Inc. and its president will pay $100,000 to resolve claims that the online marketplace for private-company shares acted as an unregistered broker, as U.S. regulators took their first action in a probe of trades involving non-public startups.
As part of the same investigation, Laurence Albukerk and his firm EB Financial Group LLC, and Frank Mazzola, principal and chief executive officer of Felix Investments LLC, were accused by the Securities and Exchange Commission of misleading investors and charging undisclosed fees in raising more than $70 million from investors seeking stakes in Silicon Valley firms, including Facebook Inc. (FB), the SEC said today.
The agency has been scrutinizing trading in closely held companies such as Facebook, which has filed to sell shares in the largest initial public offering of an Internet company. The SEC is examining whether the trades expose investors to fraud because the companies aren’t required to disclose financial data, including revenue, cash flow and debt obligations, and frequently carry restrictions, such as limits on share sales.
“The newly emerging secondary marketplace for pre-IPO stock presents risk for even savvy investors,” Marc Fagel, head of the SEC’s San Francisco office, said in the agency’s statement. “Broker-dealer registration helps ensure those who effect securities transactions can be relied upon to understand and faithfully execute their obligations to customers and the markets. SharesPost skirted these important provisions.”
SharesPost will pay $80,000 to resolve the SEC claims and company President Greg Brogger will pay $20,000. Albukerk and EB Financial agreed to pay about $310,000 to settle the claims without admitting or denying wrongdoing. Mazzola has denied the SEC’s claims in public broker filings.
The SEC approached SharesPost in December 2010 to probe its compliance strategy, Brogger said in a telephone interview.
“The exact legal question is whether or not SharesPost itself should have been a broker-dealer in 2010,” he said. “They came to the conclusion that we ought to have been a broker-dealer in 2010.”
SharesPost was granted broker-dealer status by the Financial Industry Regulatory Authority in December, Brogger said. Before that, the firm partnered with registered broker- dealers that oversaw transactions conducted between parties that met on the SharesPost site, he said.
Demand for some closely held technology companies has surged in recent years, with secondary-market transactions reaching $9.3 billion in 2011, compared with $4.6 billion a year earlier, according to Nyppex LLC.
New York-based Felix creates pools through which investors can purchase shares of non-public companies, including Facebook and Twitter Inc. The SEC also sued another of Mazzola’s firms, Facie Libre Management Associates LLC, in the matter.
According to the SEC, Mazzola and his firms engaged in self-dealing, earning secret commissions above the disclosed 5 percent on two funds’ purchases of Facebook stock and resales to new investors. The fees essentially raised prices investors paid for Facebook stock by creating a disincentive for Mazzola and his firms to negotiate for investors, the SEC said.
Mazzola and his firms also misled an investor into believing a Felix fund had acquired stock of Zynga Inc. (ZNGA) and made false representations about Twitter’s revenue to attract clients, the SEC said.
Mounting a Defense
In his public broker filings, Mazzola said that he acted appropriately and “will aggressively defend himself.”
Separate from SEC’s settlement, Finra filed a disciplinary action today against Felix, alleging that Mazzola and his colleagues engaged “in the improper public offering and sale of unregistered securities,” and made misleading claims to potential investors in private-company shares, among other offenses, according to an electronic copy of the complaint on Finra’s website.
Finra has imposed a fine of $250,000 on Felix and a total of $80,000 in fines on Mazzola and other representatives of the firm. It has also asked that Felix hire an independent consultant to review its policies and procedures, according to the document.
Albukerk and his firm hid from investors compensation earned in connection with two Facebook (FB) funds they managed, according to the SEC. They charged investors a markup after using an entity controlled by Albukerk’s wife to buy Facebook stock before acquiring interests for his EB Funds, the SEC said.
Mazzola and John Hewitt, a lawyer for McCarter & English LLP, which represents Felix Investments, didn’t immediately respond to phone calls seeking comment. Larry Albukerk didn’t immediately respond to a voice mail seeking comment.