The Financial Industry Regulatory Authority alleged in an
Both bonds defaulted and customers lost in excess of $6.2 million.
The disciplinary action was brought by FINRA against Cantone Research Inc. (CRI) and its president and majority owner, Anthony J. Cantone, as well as a representative of CRI, Raymond DeRobbio.
The firm
According to the latest filing, the first charges stem from the 2013 underwriting and sale of $2.2 million of municipal revenue bonds for the Quad Cities Regional Economic Development Authority in Illinois. Conduit bonds were issued to fund the purchase and rehabilitation of a 48-unit dormitory at a community college in the state.
CRI was the sole underwriter for both offerings and FINRA alleges that it “rushed through the due diligence process.” For example, the offering closed only three weeks after CRI representatives learned of it and began recommending that CRI customers purchase the bonds.
During those three weeks, FINRA determined that no one from CRI visited either the college or the dormitory, or even spoke with an on-site dormitory manager.
FINRA also found that CRI provided investors with optimistic financial projections but failed to provide information that called those projections into question. For example, the dormitory had low historic revenue, and had “never in its history housed the number of rent-paying residents necessary to generate the projected revenue levels.”
Additionally, CRI told investors that the dormitory management company and the Sauk Valley Community College maintained an excellent relationship. But in fact, the college had recently terminated its relationship with the dormitory.
FINRA determined that a strong relationship between the college and the dorm management company was essential to the dorm’s success, because the college was “the sole referral source for occupants of the dormitory.”
In its complaint, FINRA added, “this misrepresentation was made more material by the fact that the dormitory was entirely dependent on the college for water and sewer services, another fact omitted from the offering materials.”
For a year, CRI sold the bonds in secondary market transactions without disclosing the material information about the dormitory. CRI also did not know or disclose reasons surrounding the original underwriter’s last-minute withdrawal from the offering.
FINRA found that the original underwriter withdrew from its role as advisor/structuring agent due to concerns about the accuracy of information in the offering documents. The original underwriter had also refused to accept any fee from the proceeds of the offering.
CRI and two representatives ultimately made approximately 55 sales of the bonds and customers sustained losses of about $1.6 million.
As a result, FINRA found that CRI and the charged representatives willfully violated MSRB Rules G-19 on suitability, G-17 on fair dealing, and G-47 on time of trade disclosure.
In addition to those charges, FINRA alleged that in 2015, CRI made fraudulent misrepresentations and omissions of material fact in connection with the underwriting and sale of just over $6 million of revenue bonds in a separate offering.
The offering was for the Medical Clinic Board of the City of Montgomery, Alabama, to fund the purchase and rehabilitation of a 61-unit assisted living facility in the state.
Like the Illinois dormitory bonds, the bonds at issue in Alabama were conduit bonds, payable only from net revenue generated by the facility after payment of operating expenses.
FINRA found that CRI had a “long history” with the assisted living facility and knew of material derogatory information about both the facility and its owner. Nonetheless, CRI did not disclose that information nor its “extensive” involvement with two prior failed offerings for the facility in 2004 and 2011.
Additionally, CRI failed to disclose facility losses of more than $115,000 and a personal loan made by the owner of CRI to entities associated with the issuer in the 2011 facility offering.
Investors were also not told that the new owner of the facility had a prior criminal conviction for misusing patient funds. The owner had been barred for 15 years from participating in Medicare and Medicaid programs and had surrendered his license to operate assisted living facilities.
Instead, FINRA alleges that CRI, in its offering, “touted” that the owner “had over 35 years of experience in the assisted living business.”
For two years until 2017, CRI sold the Montgomery bonds in secondary market transactions and failed to disclose the material information about the facility and its owner. According to FINRA’s filing, CRI and its charged representatives sold approximately 103 bonds, resulting in approximately $4.6 million in customer losses.
As a result, FINRA also charged CRI with willful violation of MSRB Rules G-17 and G-47 with respect to the Montgomery bonds.
In doing so, FINRA asked the disciplinary panel to make findings of fact and conclusion of law that CRI and its charged representatives committed all of the violations charged and alleged in the complaint.
The case is Department of Enforcement v. Cantone Research, Anthony J. Cantone, and Raymond DeRobbio, No. 2017055886402.
