NASD Fines EKN Financial Services, Suspends Principals for Securities Registration Violations in Pipe Deals
Washington, D.C. — NASD has imposed a $200,000 fine against EKN Financial Services Inc. of Woodbury, NY - along with CEO Anthony Ottimo, President Thomas Giugliano, Head Trader William Baker and Financial and Operations Principal Michael Benvenuto - for engaging in improper short selling in connection with three unregistered securities offerings, commonly referred to as PIPE (Private Investment in Public Equity) deals, and other violations. As part of the settlement, EKN will be suspended for six months from engaging in any PIPE transactions.
"This action represents NASD's continued commitment to ensuring that those firms and individuals who engage in improper activity involving PIPE trading will be held accountable," said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "Suspending the firm for six months from future PIPE deals illustrates the seriousness with which we view these violations."
A PIPE is a private offering in which accredited investors agree to purchase restricted, unregistered securities of public companies. The companies agree, in turn, to file a resale registration statement so that investors can resell the shares to the public. Only after the PIPE shares registration is approved by the Securities and Exchange Commission (SEC) are investors free to sell them on the open market.
NASD found that on three separate occasions, between January and May 2004, EKN (formerly known as Ehrenkrantz King Nussbaum, Inc.) either directly or through one of its affiliated entities, MFN LLC or Wheatley Capital, purchased restricted PIPE shares in Authentidate Holding Corp. (ADAT), Radyne Comstream (RADN) and Escalon Medical Corp. (ESMC). Immediately, after agreeing to purchase these shares, but after the public announcement of the PIPE deal by the issuers, EKN established short positions in the stock without either owning unrestricted shares or borrowing unrestricted shares to cover the short sales. EKN then used the PIPE shares, once they were registered, to cover the short positions
By short selling shares of ADAT, RADN and ESMC - without borrowing unrestricted shares and while intending to cover the short sales with the restricted shares purchased in the PIPE transactions - EKN, acting through Ottimo, Giugliano and Baker, engaged in unregistered securities distributions in violation of federal securities laws.
In addition to the PIPE-related violations, NASD also found that EKN failed to maintain adequate written supervisory procedures and records in certain areas, including its research activities, and failed to report 10 customer complaints to NASD. Additionally, NASD found that on multiple occasions in 2004, EKN, acting through its Financial and Operations Principal, Michael Benvenuto, operated a securities business while failing to maintain sufficient net capital. Finally, EKN, acting through Ottimo and Giugliano, permitted an individual to act in a capacity at EKN requiring registration without being properly registered.
Of the $200,000 fine imposed against EKN, $35,000 is joint and several with Ottimo, $35,000 is joint and several with Giugliano, $15,000 is joint and several with Benvenuto and $15,000 is joint and several with Baker. Ottimo and Giugliano will also serve separate 30-day suspensions as principals and Baker will serve a 10-day suspension, also in a principal capacity. Benvenuto will be suspended for six months as a Financial and Operations Principal.
In settling with NASD, the respondents neither admitted nor denied the findings, but consented to the entry of NASD's findings and the sanctions imposed.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm through NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2005, members of the public used this service to conduct more than 4.3 million searches for existing brokers or firms and requested more than 194,000 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.