Articles Tagged with Low-Priced Securities

shutterstock_156562427The investment attorneys of Gana Weinstein LLP are investigating regulatory complaints filed by The Financial Industry Regulatory Authority’s (FINRA) against brokerage firm Finance 500, Inc. (Finance 500) and its employees including William Watson, Robert Hicks, Geoffrey Schiffrin, Paul Savage (Disciplinary Proceedings Nos. 2013038091902, 2013036837802). The complaints largely focus on allegations that the firm failed to supervise the issuance, sales, and trading of various low-priced securities or penny stocks.

According to one of the complaints, FINRA alleged that Finance 500 raised millions for four different penny stock issuers. FINRA alleged that from June 2012 to June 2014 Finance 500 failed to enforce a reasonable supervisory system to review and monitor sales of private placements by its investment banking department in the areas of due diligence, suitability, and marketing materials provided to customers. In addition, FINRA alleged that from March 2013 through June 2014, the firm used or permitted issuers to use, private placement marketing materials that were not fair and balanced and made misleading unsupported statements.

While FINRA’s investigation focused on many areas of securities issuance, one area focused on was the firm’s suitability procedures for private placements which were found to be not reasonable. FINRA stated that Finance 500 did not have an adequate procedures regarding how it would collect the suitability documents from each customer and in some cases the documents that it did collect were incomplete and did not include all requested information. In addition, FINRA found that the firm lacked procedures regarding how and when supervisory approval would be given for a particular customer and at times allowed its supervisory system to be evaded by permitting customers solicited by the firm’s registered representatives to make investments directly with the issuer.

shutterstock_176283941The Financial Industry Regulatory Authority (FINRA) has sanctioned broker Douglas Cmelik(Cmelik) concerning allegations that Cmelik improperly marked order tickets for penny stock purchases as “unsolicited” when the purchases were solicited. Cmelik’s conduct allegedly violated NASD Conduct Rule 3110 and FINRA Rule 2010.

Penny stocks are securities that carry significant investment risks. A “penny stock” is defined by the Securities and Exchange Commission (SEC) as a security issued by a company with less than $100 million in market capitalization. Penny stocks are also often called “low-priced securities” because they typically trade at less than $5 per share. Many penny stocks are very thinly traded and consequently liquidity for the stock can vary day-to-day.

Penny stocks are typically not suitable for many retail investors and consequently many firms prohibit their advisors from soliciting investments in these issuers. First, penny stocks may trade infrequently or very thinly making it difficult to liquidate a penny stock holding. Consequently, penny stocks often fluctuate wildly day-to-day. Penny stocks are often the target of unscrupulous individuals for fraudulent purposes. One scheme employed is the “pump and dump” scheme. In a pump and dump scheme, an unfounded hype for a penny stock the pumper already owns is created to boost the stock price temporarily. The penny stock pumper then sells their shares for a profit causing intense downward pressure on the penny stock and the security quickly loses value. The defrauded investors suffer huge losses as a result of the scheme.

shutterstock_175835072The Financial Industry Regulatory Authority (FINRA) has sanctioned Polar Investment Counsel, Inc. (Polar Investment) concerning allegations from 2011 and 2012, a firm advisor of Polar recommended various low-priced securities (penny stocks) received a total of 14 purchase orders for those securities. FINRA alleged that the representative marked eight of the orders as “unsolicited,” meaning that the customer instructed the advisor to purchase the security without any prompting from the advisor. FINRA found that the unsolicited marking was incorrect given that the advisor had brought the securities to the customers’ attention. FINRA found that the mismarked orders caused the firm’s books and records to be inaccurate. In addition, FINRA determined that Polar Investments did not permit brokers to recommend penny stock transactions and mistakenly assumed that all 14 transactions were unsolicited and did not conduct a sufficient supervisory review of those transactions.

Polar Investment has been registered with FINRA since 1997, its main office is in Thief River Falls, Minnesota, and is also registered as an investment advisor with the SEC. Polar Investment has 18 registered representatives operating out of 12 branch locations.

FINRA alleged that throughout 2011 and 2012, Polar Investment’s written supervisory procedures prohibited representatives from recommending penny stocks to the firm’s customers. As a consequence, Polar Investments presumed that all penny stock transactions were unsolicited and the firm did not subject advisors to adequate supervisory review. Instead, FINRA found that the firm had the customer sign a penny-stock disclosure form. FINRA found that between June 2011 and April 2012, a Polar Investment advisor by the initials “MV” brought various penny stocks to the attention of some of his customers. The advisor’s actions, according to FINRA, resulted in at least 14 orders to buy those securities.

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Royal Securities Company (Royal Securities) concerning allegations Royal lacked adequate supervision and controls in several areas.  FINRA alleged that Royal Securities failed to properly supervise two of its registered representatives, one of which utilized a unitary investment strategy for virtually all of his customers.  FIRNA also found that other representative made unsuitable recommendations in three customer accounts.

FINRA alleged that between January 2010 and May 2012, representatives of Royal Securities recommended nontraditional exchange-traded funds (Non-Traditional ETFs) to customers without having a reasonable basis to do so.  Further, FINRA found that Royal Securities failed to establish and maintain a supervisory system and training regarding the sale of Non-Traditional ETFs that was reasonably designed to comply with FINRA rules.

Royal Securities has been a FINRA member since September 1982 and the firm’s business lines include hedge funds, an investment advisory business, and a traditional brokerage business.  Royal Securities has approximately 41 registered persons operating out of nine offices.

A “penny stock” is defined by the Securities and Exchange Commission (SEC) as a security issued by a very small company, micro-cap or less than $100 million in market capitalization, and trades at less than $5 per share.  Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board or OTC Link LLC.  However, not all penny stocks trade over-the-counter and many trade on securities exchanges, including foreign securities exchanges.  In addition, the definition of penny stock can also include private companies with no active trading market.

Penny stocks are inherently risky due to several contributing factors.  First, penny stocks may trade infrequently, meaning that it may become difficult to liquidate penny stock holdings once acquired.  Second, it may be difficult to find accurate quotes for certain penny stocks.  Therefore, it may be difficult or even impossible to accurately price certain penny stocks.  Due to these risks, penny stock investors may lose their whole investment.  When penny stock investing is combined with margin borrowing the results can be catastrophic for the investor.

If the inherent risks of penny stocks were not great enough, penny stocks are often used and manipulated for fraudulent purposes.  One common scheme is the “pump and dump” scheme. The idea behind a pump and dump scheme is to create unfounded hype for a penny stock the pumper already owns.  As the pumper’s victims buy into the hype additional purchases drive up the price of the stock artificially.  The pumper then sells his shares for a large profit while those the pumper recommended the penny stock to quickly lose their money as the stock’s value decreases precipitously.

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.

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