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Five Firms Fined $385,000 by FINRA for Sale of Unregistered Securities, Other Violations Relating to Penny Stocks
Washington, DC — On April 27, 2010, the Financial Industry Regulatory Authority (FINRA) announced that it fined five broker-dealers a total of $385,000 for the illegal sale of more than 8 billion shares of penny stock on behalf of their customers. Most of those illegal sales involved one penny stock company, Universal Express Inc. Together, the five firms sold more than 7.5 billion shares of that company’s unregistered stock, for proceeds of approximately $8.4 million as reported in the FINRA news release.
Further, the firms failed to take appropriate steps to determine whether the securities could be sold without violating federal registration requirements – despite certain red flags indicating that illegal stock distributions might be taking place, including a major enforcement action by the Securities and Exchange Commission (SEC) involving Universal Express’s unregistered stock.
The FINRA article reported that the firms fined are Fagenson & Co., Inc., of New York, which reported earning $44,000 in commissions from the sale of unregistered Universal Express stock and was fined $165,000; RBC Capital Markets Corporation, of New York, which earned $68,000 in commissions and was fined $135,000; Alpine Securities Corporation, of Salt Lake City, which earned $47,000 in commissions and was fined $40,000; Equity Station, Inc., of Boca Raton, which earned $13,575 in commissions and was fined $25,000; and, Olympus Securities, LLC., of Montville, NJ, which earned $5,200 in commissions and was fined $20,000.
"Brokerage firms are the first line of defense when it comes to preventing the illegal distribution of unregistered securities into the public markets," said James S. Shorris, FINRA Executive Vice President and Executive Director of Enforcement. "The failure to detect and prevent these sales creates serious risks to the unsuspecting customers who purchased these unregistered securities."
FINRA found that in each instance, the firms’ customers deposited large blocks of thinly traded securities in certificate form and then immediately liquidated those positions. The firm executed these sales despite the fact that the SEC had filed a complaint in early 2004 alleging that Universal Express had issued more than 500 million shares of unregistered stock for distribution to the public and charging Universal’s CEO and others with issuing a series of false press releases and other false and misleading statements to promote the sale of that unregistered stock. In early 2007, a federal court ruling enjoined Universal Express from further violations of the securities laws. Ultimately, Universal Express was ordered to disgorge nearly $12 million in ill gotten gains and interest, as well as nearly $10 million in fines.
The five firms nonetheless executed most of the illegal sales of Universal Express unregistered stock either after the SEC commenced its suit or after it had prevailed in its enforcement action.
In addition, FINRA found that four of the five firms – Fagenson & Co., RBC Capital Markets, Alpine Securities and Olympus Securities – failed to establish, maintain and enforce a reasonable supervisory system designed to prevent the sale of unregistered stock.
Fagenson & Co. – FINRA found that from March 2007 through May 2008, Fagenson & Co. executed customer sell orders for approximately 1.3 billion unregistered shares of Universal Express, as well as executing sell orders for unregistered shares of at least nine other issuers. Firm customers were permitted to deposit large blocks of unregistered shares in certificate form and immediately liquidate the positions. Total net proceeds to customers from the sale of Universal Express stock exceeded $690,000, while total net proceeds from the sale of the other issuers’ securities were over $11 million. Further, the firm failed to develop and implement a reasonable anti-money laundering compliance program and failed to detect and report the suspicious activities of its customers who engaged in these transactions.
RBC Capital Markets Corporation – FINRA found that from June 2006 through October 2007, RBC Capital Markets and a predecessor entity, Carlin Equities LLC, executed customer sell orders for nearly 2.5 billion unregistered shares of eight issuers, including over two billion shares of unregistered Universal Express stock. Customers were permitted to deposit large blocks of unregistered shares in certificate form and immediately liquidate the positions, for total net proceeds to customers of approximately $2.7 million.
Alpine Securities Corp. – FINRA found that from July 2006 through July 2007, Alpine Securities executed customers’ sale orders of approximately 2.1 billion unregistered shares of Universal Express stock. Customers were permitted to deposit large blocks of unregistered shares in certificate form and immediately liquidate the positions, for total net proceeds to customers of approximately $2.7 million. Equity Station, Inc. – FINRA found that from December 2005 through June 2007, Equity Station executed customer sell orders for nearly two billion unregistered shares of Universal Express stock. Customers were permitted to deposit large blocks of unregistered shares in certificate form and immediately liquidate the positions for total net proceeds to customers of approximately $2.5 million. Olympus Securities, LLC – FINRA found that in December 2004 and from December 2006 through March 2007, Olympus Securities executed customer sell orders for more than 92 million unregistered shares of Universal Express stock. Customers were permitted to deposit large blocks of unregistered shares in certificate form and immediately liquidate the positions for total net proceeds to customers of approximately $198,000.
In settling these matters, the firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Were you sold unregistered securities from Fagenson & Co., RBC Capital Markets Corp., Alpine Corp., Equity Station, Inc., or Olympus Securities, LLC? Or did your broker or brokerage get you involved with unregistered stock from Universal Express, Inc? Call a FINRA Securities arbitration lawyer for a free consultation on how to recover your losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC. Representing investors nationwide before FINRA and the NFA.
Did you lose money at Leonard & Co.?
FINRA Fines Leonard & Co. for Sale of Unregistered Securities, Bars Broker for Unregistered Penny Stock Sales, Other Violations
FINRA Issues Regulatory Notice Regarding Sales of Unregistered Securities
Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Leonard & Co. of Troy, MI, $225,000 for numerous violations, including the illegal sale of more than two million shares of penny stock on behalf of customers. FINRA also required the firm to retain an independent consultant to review its supervisory systems and procedures.
In addition, FINRA has barred Robert J. Cole, formerly a registered representative with Leonard & Co., for his role in the illegal sales.
In a related action, FINRA today issued Regulatory Notice 09-05, Unregistered Resales of Restricted Securities, to remind firms and brokers of their obligations to determine whether securities are eligible for public sale before participating in what may be illegal distributions. It also discusses the importance of recognizing "red flags" of possible illegal, unregistered distributions and reiterates firms' obligations to conduct searching inquiries in certain circumstances to avoid participating in illegal distributions.
"This action, and the accompanying Regulatory Notice, demonstrate FINRA's continuing commitment to ensuring that brokerage firms live up to their responsibilities as gatekeepers to the securities markets," said Susan L. Merrill, Executive Vice President and Chief of Enforcement. "FINRA will aggressively pursue firms and individuals who ignore those responsibilities and participate in illegal sales of unregistered securities."
FINRA found that Leonard & Co. and Cole participated in an illegal distribution of a penny stock, Shallbetter Industries, by selling over 2.2 million unregistered shares of the stock into the public markets from three related customer accounts. Cole, who handled the accounts, was aware that trading in the accounts was directed by a "control person" of Shallbetter. A control person is generally an individual who owns 10 percent or more of the stock of a company and can influence its policies and decision-making.
Most of the shares were deposited into the accounts in certificate form with restrictive legends attached to the certificates. Although the sales were made on behalf of a control person of Shallbetter, Cole arranged to have the restrictive legends removed from the stock certificates so the unregistered shares could be sold into the public markets.
Shallbetter is a thinly-traded penny stock. During the time of the sales activity, the company claimed in public filings with the Securities and Exchange Commission (SEC) that it owned mineral exploration licenses and interests in Outer Mongolia. The sales from the Leonard & Co. accounts occurred between August and November 2006 and generated over $3.1 million in proceeds for the accounts.
FINRA found that the sales coincided with a campaign by third parties to promote Shallbetter through widespread spam e-mail and the issuance of numerous press releases. The campaign resulted in significant increases in the price and trading volume of Shallbetter stock. During five days of the period, sales of Shallbetter from the accounts at Leonard & Co. accounted for more than 20 percent of the stock's total trading volume.
FINRA found that Cole had been told about the promotional campaign in advance by Shallbetter insiders. While in possession of this information, Cole purchased 15,000 Shallbetter shares for his own account and solicited purchases of 10,000 Shallbetter shares for two customers. He also acted to support the price of Shallbetter stock in advance of the promotional campaign by placing trades and by soliciting purchases of Shallbetter stock.
FINRA found that by selling more than two million shares of unregistered Shallbetter stock into the public markets for control persons of Shallbetter, Cole and Leonard & Co. violated the registration provisions of federal securities laws. FINRA also found that Cole and Leonard & Co. failed to conduct an adequate review of Shallbetter before recommending its purchase to customers of the firm. FINRA further found that Cole participated in a scheme to manipulate the price of Shallbetter stock, purchased and recommended purchases of Shallbetter stock while in possession of material nonpublic information and sent numerous emails to customers that inappropriately touted various stocks, including Shallbetter.
In addition, FINRA found that Leonard & Co. was aware of numerous red flags indicating that an illegal distribution might be underway, but failed to conduct a reasonable inquiry into them. In fact, the firm failed to conduct an adequate inquiry even after FINRA's Market Regulation Department inquired about the unusually high volume of trading in Shallbetter stock. FINRA found that the facts available to Leonard & Co had it conducted a reasonable inquiry included:
• That the accountholder/control person who had deposited over two million Shallbetter shares into accounts at Leonard & Co. had the same address as Shallbetter, was closely associated with Shallbetter's management and controlled over 10% of Shallbetter's outstanding stock.
• That the accountholder/control person used shares in the account, or proceeds from shares in the account, to pay legal and auditing expenses for Shallbetter.
• That a former president and director of Shallbetter - who at the time was living with the accountholder/control person - directed the trading and transfers in the account.
FINRA found that Leonard & Co. failed to maintain a supervisory system reasonably designed to comply with the registration requirements, but instead relied on its clearing firm to provide such a review. FINRA, the SEC and the courts have repeatedly held that firms cannot rely on outside counsel, clearing firms, transfer agents, issuers, or issuer's counsel to discharge their obligations to undertake an inquiry into circumstances such as those present in this case. FINRA also found that Leonard & Co. failed to reasonably supervise Cole and ignored numerous red flags that he was engaging in activity that violated securities laws and regulations.
Other violations found by FINRA include the firm's failure to implement an adequate anti-money laundering (AML) program and failure to timely file suspicious activity reports in connection with certain activities, including liquidation of a large position of a thinly-traded unregistered penny stock at the direction of a corporate insider; the wiring of proceeds to third parties, some of whom were overseas; and, the accountholder's refusal to provide requested information about an entity to which he proposed to transfer funds.
Leonard & Co. also failed to retain email for 23 accounts, including the firm's executive management, registered operations staff and non-registered administrative staff, and allowed its Chief Operating Officer to act as a principal before he had requalified to act in that capacity as required by a prior settlement with FINRA.
In settling these matters, neither Leonard & Co. nor Cole admitted or denied the charges, but consented to the entry of FINRA's findings.
If you purchased unregistered securities from Leonard & Co. call 888-760-6552.