FINRA’s Spartan Capital Private Placement Case, Part 2: Due Diligence Failures, Conflicts, and Lessons for Investors and Firms

This article is Part 2 of a two-part series on FINRA’s enforcement case against Spartan Capital Securities. In Part 1, I explain the Atlas/StraightPath structure, how private placements work, and how Reg BI applies. You can read Part 1 here.

In Part 1 of this series, I described FINRA’s complaint against Spartan Capital Securities, LLC, its CEO John Lowry, and its then–interim CCO, Kim Monchik, and walked through the basics of private placements, the Atlas/ StraightPath structure, and how Reg BI applies to these types of offerings. In this second part, I focus on FINRA’s specific allegations about what went wrong in Spartan’s due diligence and supervisory framework, and what those allegations mean in practice for investors, financial professionals, and firms.

Again, these are still allegations in a pending FINRA proceeding. The respondents are entitled to contest the charges, and no final findings have been made.

The Due Diligence Allegations in Spartan: Where FINRA Says Things Broke Down

FINRA’s complaint describes a series of due diligence failures that, taken together, are meant to show that Spartan lacked any reasonable basis, and certainly no best-interest basis, to recommend the Atlas/ StraightPath offerings.

No independent due diligence at the broker-dealer level

FINRA alleges that Spartan had no formal product-approval process for these offerings and that Monchik analyzed them only in her capacity for the Atlas Funds, meaning she was effectively reviewing the deals from the issuer side rather than on behalf of the broker-dealer. According to the complaint, there was no separate, independent due diligence review performed for Spartan before the firm’s registered representatives began recommending the offerings to customers.

That distinction matters. The Atlas Funds were controlled by Spartan’s CEO, and Monchik was not only interim CCO of the firm but also heavily involved at the issuer level. When the same people are wearing both issuer and broker-dealer hats, the need for truly independent scrutiny of the offering becomes critical, not optional.

Failure to confirm that the upstream fund actually held pre-IPO shares

One of the most striking sequences in the complaint involves the question of whether StraightPath actually held the pre-IPO shares that investors were told they were getting indirect exposure to. FINRA alleges that Spartan, through the Atlas Funds, began selling offerings and wiring millions of dollars to StraightPath Fund before obtaining any documentation showing that StraightPath possessed the pre-IPO stock in question.

According to FINRA, Monchik first requested proof of StraightPath’s holdings on March 31, 2021, after three offerings had already been sold and fully funded. When that request went unanswered, she followed up in late May and early June, but still did not receive the documents she had asked for. Despite the lack of response, Spartan allegedly continued to recommend and sell the offerings. By mid-June, the firm had sold eight Atlas-related offerings and wired approximately $11.8 million in customer funds to StraightPath.

Documentation finally arrived on June 15, but FINRA says those materials did not actually establish that StraightPath held the specific pre-IPO shares at the heart of the Atlas strategy. Even then, the complaint alleges, Spartan neither demanded further proof nor suspended sales while the gaps were resolved; instead, more offerings were approved and sold.

From FINRA’s perspective, that timeline illustrates not just incomplete diligence but a failure to respond to clear red flags about whether the upstream fund held the core assets that justified the entire investment thesis. In a pre-IPO feeder fund structure, confirming the existence and control of the underlying shares is not a technicality; it is the foundation of the product.

Limited understanding of pricing, markups, and all-in costs

The complaint also focuses on how pricing and markups were handled. FINRA alleges that the Atlas Funds negotiated one price with StraightPath for the pre-IPO interests and then applied substantial markups before selling interests to customers. Those markups allegedly ranged from roughly 12.75 percent to 36.4 percent and, in total, amounted to about $3.25 million in additional, undisclosed compensation built into the offering price.

FINRA says that Monchik was aware that markups were being charged at the Atlas Fund level, yet did not incorporate those markups into her assessment of whether the offerings were appropriate for customers. The complaint further alleges that she did not investigate whether StraightPath itself had already taken its own markups or spreads on the underlying pre-IPO shares before selling to the Atlas Funds. That left a critical gap in understanding the true all-in cost of the investment to the end client.

Under Reg BI, that kind of blind spot is not acceptable. The “best interest” analysis is not limited to the quality of the issuer or the upside potential of pre-IPO exposure. It explicitly encompasses costs, fees, spreads, and markups at every layer of the structure. When a firm does not fully analyze those economic terms, it cannot credibly claim to be acting in a retail customer’s best interest.

Minimal diligence on the upstream manager

FINRA’s complaint does not just question the diligence on the Atlas Funds themselves; it also scrutinizes the work done on StraightPath Manager, the upstream entity through which all of the pre-IPO exposure was supposed to flow. According to FINRA, Spartan’s diligence on StraightPath Manager consisted largely of very basic internet research and a Lexis search that pulled information on an unrelated Georgia entity with a similar name. The complaint states that there was no meaningful review of financial statements, no serious effort to understand ownership or control, and no deep dive into regulatory or litigation history.

Despite this thin record, Spartan allegedly approved the offerings and continued to sell them to customers. StraightPath was later placed into a receivership in connection with SEC litigation and parallel criminal charges involving its principals. In a structure where the Atlas Funds were simply a conduit to StraightPath, the quality and integrity of the upstream manager were not a secondary detail; it was the investment.

Weak WSPs and poor documentation

Finally, FINRA zeroes in on Spartan’s written supervisory procedures and documentation practices for private placements. On paper, the firm’s WSPs stated that due diligence on private offerings would be conducted and that the work would be documented. In FINRA’s view, however, those procedures were generic and high-level. They did not identify who was responsible for the review, what specific steps had to be taken, what documents had to be obtained and analyzed, how findings should be recorded, or how the firm’s Reg BI obligations would be satisfied for these particular offerings.

In practice, FINRA alleges that the promised infrastructure did not exist. Due diligence checklists were not completed. There were no robust due diligence files that would allow someone to reconstruct what had been reviewed, what issues had been raised, or how those issues were resolved. The complaint further alleges that Spartan lacked written policies aimed at identifying, disclosing, and mitigating conflicts of interest associated with affiliated issuers, even though these offerings involved entities controlled by the firm’s CEO and managed day-to-day by the interim CCO.

When policies are vague and the paper trail is thin, it becomes very difficult for a firm to demonstrate that its investigation was reasonable, even if some informal work occurred. From a regulatory standpoint, undocumented diligence may be treated as diligence that never happened.

What About the Other Allegations?

Although this series focuses primarily on due diligence, the complaint includes additional allegations that round out FINRA’s theory of the case.

FINRA alleges that certain private placement memoranda and supplements contained materially misleading statements and omissions about how the pre-IPO interests were acquired and who was charging markups. In particular, the complaint says some documents suggested that a third-party affiliate was responsible for the markups, when in reality the Atlas entities themselves were adding an additional layer of compensation. FINRA characterizes those alleged misstatements as violations of FINRA Rule 2010 and Sections 17(a)(2) and 17(a)(3) of the Securities Act.

The complaint also asserts that the firm did not fully and fairly disclose material conflicts of interest. Lowry’s dual role as CEO and owner of Spartan and as the controlling person behind the Atlas entities, combined with Monchik’s position as both interim CCO of the firm and president of the issuer entities, created overlapping incentives that, according to FINRA, were not adequately spelled out for investors.

Beyond the misstatements and conflicts, FINRA alleges broader failures to establish, maintain, and enforce policies and procedures reasonably designed to comply with Reg BI’s Care, Compliance, and Conflict of Interest Obligations, as well as FINRA Rule 3110’s supervisory requirements. In the regulator’s view, these were not isolated oversights, but part of a larger pattern in which the firm’s supervisory systems did not match the complexity and conflict profile of the products it was selling.

For investors, these allegations go directly to transparency and honesty about who is getting paid and where the incentives lie. For firms and supervisors, they underscore that Reg BI compliance is not limited to the moment of recommendation; it is about the combination of accurate disclosures, robust conflict management, and credible supervisory infrastructure that surrounds the recommendation process.

Takeaways for Investors

If you are an investor considering or already holding a private placement, this case offers several practical lessons. Complex, multi-layered structures may sound sophisticated, but they often carry multi-layered fees and conflicts. When you are told that you are gaining “pre-IPO access,” it is important to understand exactly how that exposure is being obtained and who stands between you and the actual shares. In many fund-of-funds or feeder structures, your investment depends on an upstream fund truly owning or controlling the promised securities. If the firm cannot clearly explain that chain of ownership in plain language, that is a warning sign.

You are also entitled to ask direct questions about due diligence. While you may not see the firm’s internal memoranda, you can ask what steps were taken to vet the issuer, the upstream manager, and the underlying assets, and whether any significant concerns were raised in the process. Vague assurances that “we’ve done our homework” should not be the end of the conversation. If you have already suffered significant losses in a private placement, it may be worth exploring whether your broker-dealer met its Reg BI, suitability, and due diligence obligations, or whether those obligations were compromised by undisclosed fees or conflicts.

Takeaways for Financial Professionals and Firms

For advisors, supervisors, and compliance officers, the Spartan complaint is a reminder that private placements and pre-IPO feeder funds require a level of rigor that goes beyond generic product reviews. Reg BI’s Care Obligation should be treated as a front-end product-approval requirement as much as a point-of-sale standard. If the firm does not have a clear understanding of the issuer, the upstream manager, the fee stack, and the realistic risk–reward profile of the product, it is difficult to see how any recommendation could credibly be described as being in a retail customer’s best interest.

The case also highlights the importance of genuinely independent and conflict-aware due diligence. When principals of the firm have ownership or governance roles with the issuer, or when a CCO is simultaneously wearing an issuer hat, there must be a deliberate strategy to ensure that product review is not simply rubber-stamping decisions made elsewhere. Independence is not an abstract governance principle; it is central to protecting clients when conflicts run deep.

Supervisory systems and WSPs need to reflect the reality of the products the firm is selling. That means building specific private placement and pre-IPO procedures that define who is responsible for diligence, what documentation must be gathered and analyzed, how that work is recorded, and how Reg BI’s obligations, including conflicts and disclosure, are satisfied for each offering.

Finally, the complaint underscores how critical it is to respond decisively to red flags. Missing documents, non-responsive issuers, inconsistent offering materials, or unexplained markups should lead to a pause in sales until those issues are resolved. Continuing to raise capital while unresolved questions linger about holdings, pricing, or conflicts is exactly the type of pattern that attracts regulatory scrutiny and, potentially, enforcement action.

How I Help Investors and Financial Professionals

Cases like Spartan Capital highlight how quickly private placements, pre-IPO funds, and Reg BI issues can turn from abstract regulatory concepts into very real financial and professional risk. My work at AMW Law PLLC is focused on that intersection. I serve as an investment fraud attorney, securities arbitration lawyer, and FINRA lawyer, helping both individual investors and financial professionals make sense of complex products, contested disclosures, and enforcement pressure.

My perspective is shaped by having sat on almost every side of the table. I started my career in-house in Legal & Compliance at Morgan Stanley, moved into private practice litigating securities and financial disputes at Greenberg Traurig, and then served as Senior Counsel in FINRA Enforcement in New York. Today, in addition to representing clients through AMW Law, I also serve as a FINRA arbitrator. That progression, from in-house compliance to defense counsel to regulator, and now to claimants’ and industry counsel, gives me a practical sense of how regulators think, how firms react, and how cases actually play out in arbitration.

For investors, I use that background to untangle what really happened in their accounts. When a private placement, pre-IPO fund, or other complex product leads to losses, I dig into the offering documents, fee and markup structure, suitability and Reg BI materials, and the paper trail of what you were told and when. The goal is to determine whether your broker-dealer lived up to its best-interest and supervisory obligations, or whether those duties were compromised by conflicts, inadequate due diligence, or misleading disclosures. Where the facts support it, I pursue recovery through FINRA arbitration or, when appropriate, in court, with an approach tailored to your specific circumstances rather than a canned form claim.

For financial professionals, CCOs, and firms, I focus on preventing the kinds of failures that show up in enforcement complaints and Statements of Claim. That includes advising on Reg BI and private placement approval processes, helping design and refine written supervisory procedures, and stress-testing due diligence files and conflict-of-interest disclosures before they are scrutinized by FINRA or plaintiffs’ counsel. I also represent reps and firms in FINRA exams, 8210 inquiries, and enforcement matters, and I defend them in customer arbitrations involving private placements, supervision, and Reg BI issues.

Whether you are an investor dealing with unexpected losses in a private placement or an industry professional trying to navigate regulatory scrutiny around complex products, you do not have to sort through it alone. A focused, fact-specific review of your situation can clarify what went wrong, what your exposure or rights might be, and what realistic options you have for protecting your interests and moving forward.