The adviser’s co-founders sold unregistered securities in a company that was diverting most of the investor funds straight into its CEO’s pockets.
An investment adviser and its co-founders were sanctioned for selling unregistered securities and failing to disclose referral fees from those sales. The co-founders were recruited to offer and sell the securities of a company that purported to use investor funds to advance cash to small businesses. The company’s securities offering was unregistered and not exempt, however, and the adviser also failed to disclose that the co-founders received nearly $1 million each in referral fees. The company was, in reality, misappropriating a substantial portion of the investor funds and went bankrupt in 2018. For selling unregistered securities and failing to disclose the referral fees, all three respondents were ordered to pay civil money penalties, and one of the co-founders, who served as CCO, received associational and penny stock bars (In the Matter of Goldstone Financial Group, LLC, Anthony Pellegrino, and Michael Pellegrino, Release No. 33-11045, March 28, 2022).
The respondents in this action are Goldstone Financial Group, an Illinois-based investment adviser, and its co-founders, Michael Pellegrino and Anthony Pellegrino. During the time at issue, Michael Pellegrino was Goldstone’s chief compliance and investment officer. According to the Commission, between May 2017 and June 2018, Goldstone offered and sold $37 million of 1 Global Capital LLC securities to its clients in unregistered transactions. Michael Pellegrino and Anthony Pellegrino received a total of approximately $1.6 million in fees from 1 Global for selling the securities but did not disclose these fees to their clients.
1 Global. Between 2014 and July 2018, 1 Global was in the business of funding merchant cash advances (MCA), which are short-term loans to small and medium-sized businesses. The MCA business was funded almost entirely with money from investors, who purchased notes or contracts and received money from interest payments in return. 1 Global only paid that interest when investors cashed out.
1 Global and its CEO told investors that their money would be used to fund MCAs, but a substantial amount of that money went to other purposes. For example, investor funds were used for operations and non-MCA transactions. The CEO also misappropriated at least $32 million, enriching himself and his family members. 1 Global ultimately filed for bankruptcy in July 2018, leaving Goldstone clients, and many other investors, with substantial losses.
Goldstone’s sales. Goldstone was recruited by 1 Global to sell its securities in unregistered, non-exempt transactions, and Michael Pellegrino and Anthony Pellegrino offered the investment to their existing and prospective clients. Between May 2017 and June 2018, Michael Pellegrino and Anthony Pellegrino each sold around $18 million of 11 Global notes to approximately 445 clients. Each also received approximately $800,000 in referral fees, but the Commission said that Goldstone did not adequately disclose these fees to their advisory clients; Goldstone’s Form ADV during the relevant period represented that it accepted no compensation for the sales of securities (other than management fees) and did not disclose the referral fees until March 2018.
After 1 Global filed for bankruptcy, Goldstone settled with all of its 1 Global investors and returned all of the referral fees. Goldstone also hired a new compliance officer, replacing Michael Pellegrino, created a due diligence committee, and revised its policies and procedures to include a strict prohibition against the offer and sale of unregistered securities.
Violations. As a result of this conduct, the Commission found that the respondents violated Advisers Act Section 206(2)’s prohibition against fraud upon clients, as well as the registration provisions of the Securities Act. Michael Pellegrino was barred from association, from serving as an officer or director, and from participating in penny stock offerings and will pay a $50,000 civil penalty. Anthony Pellegrino was censured and will pay a $30,000 civil penalty. In addition to a series of undertakings, including retaining an independent compliance consultant, Goldstone was censured and will pay a $70,000 civil penalty.
The release is No. 33-11045.