The Securities and Exchange Commission (SEC) has announced an enforcement action against an online brokerage for allegedly having violated their gatekeeper obligations by engaging in unregistered sales of microcap stocks on behalf of their customers. The SEC said the company ignored red flags that should have alerted them that the sales were being conducted without proper exemption from federal securities registration provisions over a four-year period. Three customers of the firm routinely deposited to their accounts large quantities of newly issued penny stocks without obtaining the exemptions.
When Exemptions Apply
The securities laws generally require that all offers and sales of securities be registered with the SEC unless the offers and sales qualify for an exemption. Any broker who facilitates an unregistered sales transaction on behalf of a customer must take reasonable measures to determine whether an exemption in fact applies. According to the SEC, the firms failure to properly monitor whether an exemption applied to the unregistered transactions occurred periodically between March 2007 and April 2011.
Billions of Penny Stock Shares
The firm allegedly sold billions of penny stock shares for customers during the four-year period cited in the enforcement action. According to Andrew J. Ceresney, director of the SECs Division of Enforcement: Broker-dealers serve an important gatekeeping function that helps prevent microcap fraud by taking measures to ensure that unregistered shares dont reach the market if the registration rules arent being followed. Many billions of unregistered shares passed through gates that [the defendant] should have closed, and we will hold firms accountable when improper trading occurs on their watch.
Red Flags Ignored
Numerous red flags should have indicated potential improper sales of securities: The customers claimed that the penny stocks were freely tradable, and they placed orders for the sale of the securities to the public through resales without any registration statements being in effect. Following the resales, the customers immediately wired the sales proceeds out of their accounts. The firm relied on an exemption from registration for broker-dealers that permits them to execute a customers unregistered sales of securities if, after a reasonable inquiry, no circumstances are found indicating that the customer is violating registration requirements. It is alleged that the firm initially failed to identify any exemptions applicable to the customers and failed to perform a search in order to be reasonably certain that the exemptions applied for each unregistered sale executed by the three customers.
Disgorgement and Fines
The firm agreed to settle the SECs charges by paying back more than $1.5 million in disgorgement and prejudgment interest from commissions they earned on the improper sales, and they agreed to pay a combined penalty of $1 million.
David draws on 20+ years’ experience in both legal practice and in business services delivery since his own call to the Bar in 1989. With several years in the startup environment, including as a co-founder in the legal tech space specifically, he brings a unique and timely perspective on the role of data, automation and artificial intelligence in the modern and efficient delivery of services for legal consumers. Having been both a corporate buyer of legal services and a services provider, he identifies the greater efficiency and value that can be achieved in legal operations for corporate buyers especially.
An attorney, David worked for law firms Pinsent Masons and Linklaters in London before moving to New York to join Credit Suisse. As CAO, he helped negotiate & execute the relocation of Credit Suisse into its new NYC global HQ. Subsequently, David directed major global outsourcing, shared sourcing, HR operations & process efficiency initiatives including the digitization of records, the global roll-out of PeopleSoft HRMS & Y2K. David has worked extensively in the UK, US, Philippines, India and China markets in the areas of data management, human resources and business process outsourcing.
Most recently, David has been successfully investing in and serving as an advisory board member of several legal services start-ups including a cloud-based solution for legal process automation and e-filing; and a technology solution for large-scale capture of court and other public data used for litigation analysis, among others.
David graduated from the University of Manchester with Honors in Law and Bar School (College of Legal Education) in London, and has been a member of Middle Temple since 1989. He is the founder and former Chairman of The Global Sourcing Council.
Member: Bar of England & Wales, ABA, NYCBA, ACC, DRI