In October 2016, Michael Babyak, Jr. II (Babyak), a registered representative, settled a complaint with the Financial Industry Regulatory Authority (FINRA), which alleged he participated in outside business activities. Specifically, FINRA alleged Babyak solicited 4 customers to invest in a limited liability company he set up, without notice to his firm. Based upon these allegations, FINRA barred Babyak from the financial industry.
Babyak (FINRA CRD No. 2376943) entered the securities industry in 1994 as a general securities representative. From 1994 to 2015, and during the relevant time period, Babyak worked for LPL Financial LLC (“LPL”). From December 2015 through September 2016, Babyak worked for Leigh Baldwin & Co., LLC. Babyak is no longer associated with any FINRA-member; however, he remains subject to FINRA’s jurisdiction.
FINRA requires employees of FINRA-member firms to disclose all outside business-related activities, private transactions and all investments recommended to any customers to the member firm. The unlawful business practice of recommending investments outside of a financial advisor’s firm is often referred to as “selling away.” Outside business transactions and selling away are prohibited activities because they serve to undercut the supervisory system implemented by FINRA-member firms and FINRA itself to protect the investing public.
FINRA’s Department of Enforcement investigated Babyak and alleged he solicited four customers to invest a total of $4,250,000 into an LLC that he set up. FINRA alleged Babyak arranged for the LLC to use funds repaid from the $4.25 million loan to provide two additional borrowers loans in 2014 and 2015. According to FINRA, Babyak did not disclose these transactions to LPL and did not receive prior approval.
Based upon the foregoing misconduct, FINRA alleges Babyak violated NASD Conduct Rule 3040 and FINRA Rule 2010. For example, NASD Rule 3040 states no FINRA registered person may be an employee or receive compensation for outside business transactions unless he or she has provided prior written notice to their employer. Here, Babyak did not disclose his participation in the LLC and loans, and therefore, violated FINRA rules.
Lufrano Law, LLC is a national securities litigation firm and has experience representing investors who have investment disputes with brokers and broker-dealers. If you suffered investment damages investing with Babyak while he worked for LPL, you may be able to recover your losses through FINRA arbitration. Our firm only receives a fee if you recover money. Please contact one of our attorneys at (800) 627-2179 to schedule a free consultation or complete our free case evaluator.