FINRA Sanctions Cantor Fitzgerald & Co. $7.3 Million for Selling Billions of Unregistered Microcap Shares, and for Related Supervisory and AML Violations

Trader and Supervisor Suspended and Fined

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Cantor Fitzgerald & Co. $6 million and ordered disgorgement of nearly $1.3 million in commissions, plus interest, for selling billions of unregistered microcap shares in violation of federal law. Cantor Fitzgerald & Co. was also sanctioned for failing to have adequate supervisory or anti-money laundering (AML) programs tailored to detect "red flags" or suspicious activity connected to its microcap activity. In addition, two of the firm's business executives were suspended and fined: Jarred Kessler, Executive Managing Director of Equity Capital Markets during the relevant period, was suspended for three months in a principal capacity and fined $35,000 for supervisory failures; and equity trader Joseph Ludovico was suspended in all capacities for two months and fined $25,000.

FINRA found that Cantor Fitzgerald & Co.'s supervisory system was not reasonably designed to satisfy the firm's affirmative obligation to determine whether the microcap securities that it was liquidating for clients were registered with the Securities and Exchange Commission or subject to an exemption from registration. While Cantor Fitzgerald & Co. made a business decision to expand its microcap liquidation business in March 2011, it failed to ensure that its supervisory system included a reasonable and meaningful inquiry into whether these sales were lawful. Among Cantor Fitzgerald & Co.'s failings were insufficient guidance and inadequate training about when or how to inquire into whether a sale was exempt, and inadequate tools for supervisors to identify red flags associated with illegal, unregistered distributions. As a result of these failures, Cantor Fitzgerald & Co. and Ludovico, as the broker of record, sold billions of shares of thinly traded microcap securities between March 2011 and September 2012 without adequate review and due diligence, a significant portion of which were neither registered nor exempt from registration. These violations were accompanied by a failure to implement an adequate AML program tailored to detect red flags and patterns of potentially suspicious money laundering activity related to these sales.

Kessler, a former senior supervisor of Cantor Fitzgerald & Co.'s equities business, failed to respond adequately to a number of red flags indicating the firm's existing supervisory system was insufficient to support the expansion of Cantor & Co.'s microcap liquidation business. In particular, Kessler knew that the expanding microcap business posed unique challenges and was generating an increasing number of regulatory inquiries, but nonetheless delegated his supervisory responsibilities to a central review group without taking sufficient steps to investigate the adequacy of their efforts.

Brad Bennett, FINRA's Executive Vice President and Chief of Enforcement, said, "If a broker-dealer is looking to increase its revenues by expanding a high-risk business line, the firm and its supervisors must tailor their supervision to the risks associated with those businesses. This is especially true when the new business involves the mass liquidation of microcap securities, which presents overwhelming risks of fraud and investor harm. FINRA has no tolerance for firms and business executives who choose to engage in this business without robust systems designed to ensure that they do not become participants in illegal, unregistered distributions."

In settling this matter, the respondents neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2014, members of the public used this service to conduct 18.9 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA's Disciplinary Actions Online database. Investors can also call FINRA's Securities Helpline for Seniors at (844) 57-HELPS for assistance or to raise concerns about issues they have with their brokerage accounts and investments.

FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.