Oppenheimer Fined $ 1.4 Million by FINRA For Alleged Improper Sale of Penny Stocks

On May 6, 2013 the Financial Industry Regulatory Authority (FINRA) filed a complaint against Oppenheimer & Co. (Oppenheimer) for the sale of unregistered penny stock shares and for not having an adequate anti-money laundering (AML) compliance program to detect suspicious penny stock transactions.

On July 9, 2013 and August 5, 2013, Oppenheimer settled with FINRA agreeing to the sanctions and paying a fee of $1.4 million to resolve the charges brought in the complaint.  In agreeing to the settlement Oppenheimer neither admits nor denies any of the allegations made against the firm.

The alleged penny stock sales took place from August 19, 2008, through September 20, 2010. According to the settlement, the stocks were sold through seven brokers out of five different branch offices around the country.  These seven brokers reportedly sold over one billion shares of twenty penny stocks without registration or any applicable exemption from registration. Customers are said to have deposited “large blocks” of penny stock shortly after opening the accounts, then liquidated the accounts and transferred the proceeds out.

It was alleged that Oppenheimer’s supervisory and anti-money laundering systems failed to detect the improper activities.  The supervisory system failed in two ways.  First, the firm knew customers were depositing and selling large blocks of the penny stocks but Oppenheimer’s supervisory reviews were inadequate to determine if the stocks were registered.  Second, the firm took inadequate steps to follow up on red flags to determine if the stocks were registered.  FINRA also found that the firm’s procedures governing penny stocks to be inadequate because the firm did was unable to determine if the stocks were restricted or freely tradable.

FINRA found that Oppenheimer needed an independent consultant to conduct a “comprehensive review of the adequacy of Oppenheimer’s penny stock and AML policies, systems and procedures.”  This is not the first time FINRA has had an issue with Oppenheimer’s supervisory systems.  In 2005, Oppenheimer was fined $2.8 million for failing to comply with the U.S. Bank Secrecy Act.

 What is a Penny Stock?

The original definition of a penny stock was any stock that was traded for less than a dollar per sale but the SEC modified the definition to include any shares that are traded under $5. Penny stocks are considered to be “very risky investments” and are typically associated with growing companies with limited cash and resources. One risk associated with penny stocks is that they may trade infrequently making it difficult to sell them once you have purchased them. They are generally traded over the counter but may also be traded on securities exchanges. Because of the “speculative nature of penny stocks the SEC requires brokers to:

  1. Approve the customer for the specific penny stock transaction and receive from the customer a written agreement to the transaction;
  2. Furnish the customer a disclosure document describing the risks of investing in penny stocks;
  3. Disclose to the customer the current market quotation, if any, for the penny stock; and
  4. Disclose to the customer the amount of compensation the firm and its broker will receive for the trade.
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