FINRA Censures Axiom Capital Management: True Pharmastrip Fraud

A recent Financial Industry Regulatory Authority enforcement action against New York City broker-dealer firm Axiom Capital Management (CRD# 26580) alleges that the firm failed to conduct reasonable ongoing diligence into a private placement offering. FINRA records show that Axiom operates four branches with a total of 30 registered representatives.

According to a Letter of Acceptance, Waiver, and Consent (No. 2019064535601), FINRA sanctioned Axiom Capital Management in connection with its service as a sub-agent for a private placement offering by True Pharmastrip, Inc. (TPI) in 2019. The AWC Letter describes True Pharmastrip as “a Canadian start-up company that planned to develop and distribute cannabis-infused oral film strips in the U.S and Canada.” In its pre-offering due diligence, Axiom allegedly discovered that the startup’s founder had been sued by the US Federal trade Commission “for fraud in connection with a different company that he had founded earlier that also sold oral film strips.” His assets, as well as the assets of companies under his ownership or control, had been frozen in connection with the FTC’s lawsuit, which led to the CEO’s resignation and divestment from True Pharmastrip. Despite his resignation, the AWC Letter states, he “continued to play an active role” as a “consultant” to the startup, and remained “heavily involved” in its private placement offering.

FINRA found that Axiom Capital Management “recognized the FTC’s lawsuit against [the ex-CEO] to be a red flag given his role at the company” and “discussed its concerns with the lead placement agent.” When the startup initiated its private placement offering selling period, the AWC states, the Federal Trade Commission pursued an asset freeze against its assets as well as a contempt order against its CEO, who was allegedly “funneling” company assets to the ex-CEO “for his personal use.” Axiom Capital was allegedly “unaware of  these developments during the three-month offering period because it unreasonably relied on” True Pharmastrip and its ex-CEO for information about ongoing developments in the FTC lawsuit against them. After the selling period, the startup’s CEO was found to be in contempt, and the startup was ordered to transfer $1.205 million to a receiver. This sum constituted “a substantial portion of its assets,” according to the AWC Letter, which notes that the startup subsequently “failed to repay the investors in the offering when the debenture units matured in 2021.”

FINRA’s findings state that Axiom Capital “unreasonably relied on the lead placement agent, TPI, and the defendant in the lawsuit to keep it apprised of material developments” regarding the FTC’s lawsuit, failed to seek any written explanation regarding the lawsuit from True Pharmastrip, failed to make an effort to verify the representations it did receive regarding the lawsuit, failed to review the lawsuit’s “public docket,” and engaged in other failures of reasonable diligence. As a result of these failures, FINRA found, it “lacked a reasonable basis to continue to recommend the TPI offering to customers,” violating FINRA rules. As a result of these and other findings, FINRA censured the firm and ordered it to pay a fine of $40,000, plus disgorgement of $7,000. (Information current as of August 16, 2022.)

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