NASD Fines Clearing Firm, Two Other Firms More Than $300,000 For Facilitating Violations of Net Capital Rule
Washington, DC — NASD announced today that it has fined two firms, First Avantus Securities, Inc. (now known as Riverstone Wealth Management, Inc.) of Austin, TX, and National Securities Corporation of Seattle, WA, as well as their clearing firm, First Clearing Corporation of Glen Allen, VA, for engaging in conduct that circumvented and/or assisted in circumventing the net capital rule. Specifically, First Clearing entered into agreements with the two introducing firms that resulted in those firms failing to appropriately book liabilities, thereby creating net capital deficiencies. First Clearing also provided clearing and execution services to First Avantus and National Securities while those firms were in violation of the net capital rule.
First Avantus was fined $100,000. Three of its principals were fined a total of $75,000 and suspended from serving in principal capacities for periods ranging from sixty days to four months. First Clearing was fined $110,000, of which $17,500 was assessed jointly and severally against its president. National Securities and its president were jointly and severally fined $30,000 for net capital violations. National was fined an additional $55,000 for supervisory and books and records violations, as well as for violations of the membership application rules for failing to seek approval of a material change in its business.
"Net capital requirements are designed to help ensure the financial stability of broker-dealer firms, and accurate financial reporting is a cornerstone of the process," said Barry Goldsmith, NASD Executive Vice President and Head of Enforcement. "The transactions that these firms engaged in hid liabilities and resulted in making inaccurate financial information available to regulatory authorities."
First Avantus entered into an agreement with First Clearing that had the effect of concealing certain liabilities. National Securities entered into an agreement with First Clearing that subsequently created a net capital deficiency for National Securities. The duration and extent of these violations ranged up to 22 months, with net capital deficiencies ranging from $119,000 to $1.452 million.
In the matter involving First Avantus and First Clearing, a dispute arose between the two firms in October 2001 over responsibility for a failed customer check in the amount of $2.8 million. To resolve arbitration proceedings arising from this dispute, First Avantus and First Clearing entered into a settlement agreement, the terms of which required First Clearing to assume responsibility for the customer's unsecured debit balance, which was otherwise a liability of First Avantus. In return, First Avantus agreed to increase its monthly clearing fees due to First Clearing by $500,000 over five years. Neither First Clearing nor First Avantus treated the $500,000 payment as a liability of First Avantus. Nevertheless, First Avantus continued to conduct a securities business, thus violating the net capital rule, and First Clearing continued to provide clearing and execution services for First Avantus. In a separate instance, beginning in March 2002, First Avantus failed to treat a customer's unsecured debit balance, which had risen to almost $206,000, as a firm liability for a period of at least five months. These liabilities resulted in net capital deficiencies during the relevant periods of $222,000 to $557,000.
In the matter involving National Securities, First Clearing advanced a loan to National Securities' parent, Olympia Cascade, in August 2001. In connection with the loan, Olympia Cascade and National Securities entered into a security agreement pledging National Securities' assets as collateral for the loan. As a result of that security agreement, the value of National Securities' assets should have been deducted from its net capital to the extent of any liability owed by National Securities' parent under the terms of the promissory note. National Securities failed to do so, resulting in capital deficiencies between $119,000 to $1.452 million, over a 22-month period.
In addition to the three firms, NASD took action against the following individuals in connection with the net capital violations. Each of the individuals played a role with regard to the transactions that created the net capital violations.
- David Lawrence Williams of Richmond, VA, formerly the President of First Clearing. Williams was censured and fined $17,500, jointly and severally with First Clearing.
- Steven A. Rothstein of Wilmette, IL, formerly Chairman and Chief Executive Officer of National Securities. Rothstein was censured and fined $30,000, jointly and severally with National Securities.
- Brian Edward Smith of Austin, TX, President of First Avantus. Smith was fined $25,000, jointly and severally with First Avantus. In addition, Smith was suspended from serving in any principal capacity for sixty days.
- Bryan Torrey Forman of Tyler, TX, formerly Chief Executive Officer of First Avantus. Forman was fined $25,000 and suspended from serving in any principal capacity for four months.
- Kyle Timothy Holland of Austin, TX, formerly the Chief Financial Officer of First Avantus. Holland was fined $25,000 and suspended in all capacities for one month and in any principal capacity for three months for violations that included the net capital issues noted above.
In settling this matter with NASD, the parties neither admitted nor denied the charges, but consented to the entry of NASD's findings.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2004, members of the public used this service to conduct more than 3.8 million searches for existing brokers or firms and requested more than 190,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (800) 289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.nasd.com.