FINRA Orders National Securities Corp. to Pay $9 Million for Attempting to Artificially Influence the Aftermarket in 10 Offerings, and Other Violations
NSC Ordered to Pay Over $625,000 in Restitution to Customers Who Bought GPB Capital Private Placements After NSC Failed to Inform Them of Material Information
WASHINGTON—FINRA announced today that it has sanctioned National Securities Corporation (NSC) approximately $9 million, including disgorgement of $4.77 million in net profits the firm received for underwriting 10 public offerings in which NSC attempted to artificially influence the market for the offered securities.
FINRA also ordered NSC to pay more than $625,000 in restitution for failing to disclose material information to customers who purchased GPB Capital Holdings, LLC private placements. In addition, FINRA imposed a $3.6 million fine for this misconduct and various other supervisory and operational violations.
“Investors are entitled to rely on a market that is free from artificial price movement created by underwriters,” said Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement. “We will continue to vigilantly enforce rules designed to prevent underwriters from influencing the market for an offered security, including supporting the offering price by creating a perception of aftermarket demand.”
FINRA found that between June 2016 and December 2018, NSC, while acting as an underwriter for three initial public offerings and seven follow-on offerings, violated Rule 101 of Regulation M under the Securities Exchange Act of 1934 by unlawfully inducing or attempting to induce certain customers to purchase stock in the aftermarket of the offerings prior to their completion.
Rule 101 prohibits underwriters, during a restricted period, from attempting to induce any person to bid for or purchase any offered security in the aftermarket.
FINRA found that NSC violated Regulation M in connection with 10 offerings by engaging in some combination of the following misconduct during each offering’s restricted period:
- Expressly conditioning allocations on a branch manager’s or representative’s agreement to buy a specific number of shares in the aftermarket for the branch’s or representative’s customers (known as “tie-in agreements”);
- Agreeing to solicit customers who received allocations to purchase additional shares in the immediate aftermarket; and
- Threatening to reduce allocations to representatives who would not agree to solicit their customers to participate in the aftermarket.
NSC’s conduct was aimed at artificially stimulating demand and supporting the price of the offered securities, which tended to be thinly traded, in the immediate aftermarket. The aftermarket performance of NSC’s underwritten offerings was important to the firm’s reputation and ability to generate future investment banking revenue.
The settlement resolves multiple other charges against NSC, including that the firm:
- Between April 2018 and July 2018, negligently omitted to tell investors in two offerings related to GPB Capital about delays in the issuer’s required public filings, including audited financial statements—for which FINRA has ordered the firm to pay restitution of more than $625,000 to those customers;
- Between January 2005 and April 2020, failed to obtain locates for over 33,000 short sale transactions as required by Rule 203(b)(1) of Regulation SHO under the Exchange Act;
- Between September 2013 and May 2017, failed to reasonably supervise one of its representatives by failing to respond to multiple red flags that he was falsifying information about customers’ assets and suitability information in order to avoid NSC’s limits on concentration levels that applied to his non-traded real estate investment trust recommendations; and
- Made inaccurate representations to FINRA concerning the sales of stock warrants it received in connection with an October 2019 public offering.
In settling this matter, NSC consented to the entry of FINRA’s findings without admitting or denying the charges.
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs 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 a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.