FINRA Fines Five Firms $385,000 for Sale of Unregistered Securities, Other Violations Relating to Penny Stocks
Together, the Firms Sold 7.5 Billion Shares of Unregistered Universal Express Stock; Fagenson & Co. Also Found to Have Inadequate Anti-Money Laundering Program
Washington, DC — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined five broker-dealers a total of $385,000 for the illegal sale of more than 8 billion shares of penny stock on behalf of their customers. Most of those illegal sales involved one penny stock company, Universal Express Inc. Together, the five firms sold more than 7.5 billion shares of that company's unregistered stock, for proceeds of approximately $8.4 million.
Further, the firms failed to take appropriate steps to determine whether the securities could be sold without violating federal registration requirements – despite certain red flags indicating that illegal stock distributions might be taking place, including a major enforcement action by the Securities and Exchange Commission (SEC) involving Universal Express's unregistered stock.
The firms are Fagenson & Co., Inc., of New York, which reported earning $44,000 in commissions from the sale of unregistered Universal Express stock and was fined $165,000; RBC Capital Markets Corporation, of New York, which earned $68,000 in commissions and was fined $135,000; Alpine Securities Corporation, of Salt Lake City, which earned $47,000 in commissions and was fined $40,000; Equity Station, Inc., of Boca Raton, which earned $13,575 in commissions and was fined $25,000; and, Olympus Securities, LLC., of Montville, NJ, which earned $5,200 in commissions and was fined $20,000.
"Brokerage firms are the first line of defense when it comes to preventing the illegal distribution of unregistered securities into the public markets," said James S. Shorris, FINRA Executive Vice President and Executive Director of Enforcement. "The failure to detect and prevent these sales creates serious risks to the unsuspecting customers who purchased these unregistered securities."
FINRA found that in each instance, the firms' customers deposited large blocks of thinly traded securities in certificate form and then immediately liquidated those positions. The firm executed these sales despite the fact that the SEC had filed a complaint in early 2004 alleging that Universal Express had issued more than 500 million shares of unregistered stock for distribution to the public and charging Universal's CEO and others with issuing a series of false press releases and other false and misleading statements to promote the sale of that unregistered stock. In early 2007, a federal court ruling enjoined Universal Express from further violations of the securities laws. Ultimately, Universal Express was ordered to disgorge nearly $12 million in ill gotten gains and interest, as well as nearly $10 million in fines.
The five firms nonetheless executed most of the illegal sales of Universal Express unregistered stock either after the SEC commenced its suit or after it had prevailed in its enforcement action.
In addition, FINRA found that four of the five firms – Fagenson & Co., RBC Capital Markets, Alpine Securities and Olympus Securities – failed to establish, maintain and enforce a reasonable supervisory system designed to prevent the sale of unregistered stock.
- Fagenson & Co. – FINRA found that from March 2007 through May 2008, Fagenson & Co. executed customer sell orders for approximately 1.3 billion unregistered shares of Universal Express, as well as executing sell orders for unregistered shares of at least nine other issuers. Firm customers were permitted to deposit large blocks of unregistered shares in certificate form and immediately liquidate the positions. Total net proceeds to customers from the sale of Universal Express stock exceeded $690,000, while total net proceeds from the sale of the other issuers' securities were over $11 million. Further, the firm failed to develop and implement a reasonable anti-money laundering compliance program and failed to detect and report the suspicious activities of its customers who engaged in these transactions.
- RBC Capital Markets Corporation – FINRA found that from June 2006 through October 2007, RBC Capital Markets and a predecessor entity, Carlin Equities LLC, executed customer sell orders for nearly 2.5 billion unregistered shares of eight issuers, including over two billion shares of unregistered Universal Express stock. Customers were permitted to deposit large blocks of unregistered shares in certificate form and immediately liquidate the positions, for total net proceeds to customers of approximately $2.7 million.
- Alpine Securities Corp. – FINRA found that from July 2006 through July 2007, Alpine Securities executed customers' sale orders of approximately 2.1 billion unregistered shares of Universal Express stock. Customers were permitted to deposit large blocks of unregistered shares in certificate form and immediately liquidate the positions, for total net proceeds to customers of approximately $2.7 million.
- Equity Station, Inc. – FINRA found that from December 2005 through June 2007, Equity Station executed customer sell orders for nearly two billion unregistered shares of Universal Express stock. Customers were permitted to deposit large blocks of unregistered shares in certificate form and immediately liquidate the positions for total net proceeds to customers of approximately $2.5 million.
- Olympus Securities, LLC – FINRA found that in December 2004 and from December 2006 through March 2007, Olympus Securities executed customer sell orders for more than 92 million unregistered shares of Universal Express stock. Customers were permitted to deposit large blocks of unregistered shares in certificate form and immediately liquidate the positions for total net proceeds to customers of approximately $198,000.
In settling these matters, the firms neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Last year, FINRA issued Regulatory Notice 09-05, Unregistered Resales of Restricted Securities, reminding firms and brokers of their obligations to determine whether securities are eligible for public sale before participating in what may be illegal distributions. It also discusses the importance of recognizing red flags of possible illegal, unregistered distributions and reiterates firms' obligations to conduct searching inquiries in certain circumstances to avoid participating in illegal distributions.
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 2009, members of the public used this service to conduct 18.5 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
FINRA is the largest non-governmental 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 and enforcing rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.finra.org.