## Facts

- Michael Frederick Siegel was a registered general securities representative associated with an NASD member firm, Rauscher Pierce Refsnes, Inc., from approximately October 1997 to June 1999.
- Siegel became involved with World Environmental Technologies, Inc. (World-ET), a speculative start-up, and agreed to help raise capital in exchange for cash and stock compensation.
- Siegel introduced World-ET investments to two customer couples (the Downers and the Landrys), who relied on him for financial guidance.
- Siegel provided customers with subscription materials for World-ET-related securities without reviewing them; the documents were inconsistent and omitted basic terms (e.g., interest rate, maturity date, and repayment schedule).
- After an initial investment pathway changed, Siegel encouraged the Downers to reinvest directly in World-ET rather than obtain a refund, stating he would choose the parent-company investment.
- Siegel told the Landrys that he and the Downers were investing amounts substantially above the minimum, while emphasizing his enthusiasm for the company and product.
- Siegel did not provide prior written notice to his firm that he was participating in these outside securities transactions or that he expected compensation.
- World-ET failed, and the affected customers lost their entire investments.
- FINRA (then NASD) found Siegel violated Rules 3040 and 2110 (private securities transactions without notice) and Rules 2310 and 2110 (unsuitable recommendations), imposing consecutive six-month suspensions, a $30,000 fine, and $400,300 restitution plus costs.
- Siegel sought SEC review of FINRA’s findings and sanctions.

## Issues

1. Whether Siegel’s involvement in the World-ET offerings constituted “private securities transactions” under NASD Rule 3040 and, if so, whether he violated Rules 3040 and 2110 by failing to provide prior written notice to his member firm.
2. Whether Siegel’s recommendations that customers invest in World-ET were unsuitable under NASD Rule 2310 and therefore also violated Rule 2110.
3. Whether the imposed sanctions and restitution were excessive or oppressive, or otherwise inconsistent with the public interest.

## Decision

- The SEC sustained FINRA’s findings that Siegel participated in private securities transactions outside his firm without providing the required prior written notice, violating NASD Rules 3040 and 2110.
- The SEC sustained FINRA’s findings that Siegel made unsuitable recommendations by failing to conduct a reasonable investigation and by recommending a speculative investment using incomplete and contradictory materials, violating NASD Rules 2310 and 2110.
- The SEC sustained the sanctions in full: two consecutive six-month suspensions in all capacities, a total $30,000 fine, and $400,300 restitution plus costs.

## Legal Principles

- A representative’s participation in securities transactions outside the regular course or scope of employment, including unregistered offerings where the representative expects compensation, constitutes a “private securities transaction” requiring prior written notice to the member firm under NASD Rule 3040.
- Failure to provide the firm with prior written notice describing the transaction, the representative’s role, and expected compensation violates NASD Rule 3040 and also constitutes conduct inconsistent with just and equitable principles of trade under NASD Rule 2110.
- NASD Rule 2310 requires a representative to have reasonable grounds for believing a recommendation is suitable, which includes a reasonable investigation of the security and an understanding of key terms and risks.
- Recommending speculative securities while failing to review, reconcile, or even understand materially incomplete or inconsistent offering documents lacks a reasonable basis and violates NASD Rule 2310, and correspondingly NASD Rule 2110.
- On review, the SEC sustains SRO sanctions unless they are excessive or oppressive or otherwise inconsistent with the public interest; significant customer harm and multiple, distinct rule violations support substantial suspensions, fines, and restitution.

## Conclusion

The SEC upheld FINRA’s determination that Siegel sold away by arranging World-ET investments without providing prior written notice to his firm and violated suitability obligations by recommending a speculative investment without adequate investigation, affirming consecutive suspensions, a $30,000 fine, and $400,300 in restitution.


In re Michael Frederick Siegel, Exchange Act Release No. 58737, 2008 SEC LEXIS 2459 (Oct. 6, 2008)