In The Matter Of Kevin D. Kun Exchange Act Release No.

Facts

VesCor was in the business of originating, purchasing, and selling loans secured by real property. VesCor financed its business through sales to the public of certain investment vehicles, including Wholesale Accrual Notes (Accrual Notes), Wholesale Monthly Income Notes (Notes), and Wholesale Mortgage Loan Participation Interests (MLP Interests). VesCor sold all three instruments without registering the transactions under the Securities Act. The State of Nevada concluded that the Notes and the MLP Interests were securities. VesCor was required to make a rescission offer to existing holders of the Notes and MLP Interests in Nevada. VesCor did this by partnering the offer to rescind with an offer to reinvest the funds in the Notes and MLP interests correctly identified in a PPM as securities. VesCor also made the same rescission offer to investors in other states and sought to raise new funds. D had become acquainted with VesCor and Southwick in 1987, and he joined VesCor as an employee in August 1994. D was encouraged to leave VesCor in order to form a broker-dealer. Southwick, through VesCor, agreed to provide the funds needed to form the broker-dealer. D and Cline began the NASD member application process for K&C in October 1994. D, Cline, and VesCor anticipated that, once K&C was registered with the NASD, K&C would act as selling agent or underwriter for the private placement offerings and possibly for an anticipated, later 'SB-2 public offering.' The NASD approved K&C's membership application on December 13, 1994. The VesCor transactions in question occurred after this date. VesCor created six PPMs to accompany the simultaneous rescission offerings, providing two different PPMs for each of the three investment vehicles. One set of three was used for residents of Nevada, and another set of three was used for residents of other states. The PPMs indicated that the Notes and MLP Interests were securities that would not be registered under the Securities Act or any state securities laws. Only the PPMs for Nevada residents litigation history (which included outstanding civil judgments totaling over $1.8 million stemming from his previous business activities, as required by VesCor's settlement with Nevada. None of the PPMs disclosed the relationship between VesCor and D and K&C. All six PPMs used the same financial statement, in which D was surprised by the sizeable net operating loss that had accumulated since 1991. D made no real investigation concerning any of the matters in the financial statements included in the PPMs. D understood that the purpose for VesCor's acquisition of the Tennessee land was to use the land as a balance sheet enhancement, meaning that Southwick would acquire the property for a short period of time to make his private placement look good and saleable. D and K&C offered and sold VesCor securities to customers. The memoranda given to investors stated that VesCor would use the proceeds to fund VesCor’s expansion and that the source of the proceeds would be from the sale of the accrual notes, monthly notes, and third-party mortgages. D stated that neither he nor K&C attempted to verify the number of non-accredited investors for any of the VesCor offerings until the NASD requested information in connection with its investigation in September 1995. Sales were made to many more than 35 nonaccredited investors for the Accrual Notes and the Monthly Notes. NASD found that the PPMs materially misrepresented VesCor's financial condition and omitted disclosure of material information about the relationship between Applicants and VesCor and about Southwick's litigation history. The issue is whether the conduct of D and K&C in making such offerings and sales was inconsistent with high standards of commercial honor and just and equitable principles of trade, in violation of the NASD's Conduct Rule 2110.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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