FINRA fined Cantor Fitzgerald & Co. $6 million and ordered disgorgement of almost $1.3 million in commissions for its sale of billions of unregistered shares in thinly traded microcap shares. FINRA also sanctioned the firm for failing to have in place adequate supervisory or anti-money laundering (AML) programs tailored to detect red flags or suspicious activity in connection with its microcap stock activities. Additionally, two of the firm’s employees were suspended and fined. As is customary in a FINRA settlement (known as a AWC – Acceptance, Waiver and Consent), neither the firm nor its employees admitted or denied the charges, but consented to FINRA’s findings.
According to the FINRA settlement, Cantor Fitzgerald made a business decision to expand its microcap liquidation business in March 2011, but failed to ensure that its supervisory system kept up. Specifically, FINRA alleged that the firm failed to provide sufficient guidance and adequate training about when or how to inquire into whether a sale of microcap shares was exempt from registration, and did not have sufficient supervisory tools to identify red flags potentially indicative of an illegal, unregistered stock distribution.
Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, commented: “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.”
I find Bennet’s comments on this issue most telling. Over the years, my law firm has represented both broker-dealers and registered representatives in FINRA investigations and enforcement actions involving microcap and penny stock liquidations. From the cases I have defended, it is clear to me that: (1) FINRA simply abhors this line of business, (2) FINRA is consistently increasing its monetary penalties on firms and individuals for violations in this space as a deterrent to stay out of it, and (3) FINRA will almost always find fault with the adequacy of the firm’ supervisory and AML procedures (an inherently subjective determination) if it believes there has been an illegal, unregistered distribution of shares. While under FINRA’s own rules a broker-dealer’s supervisory system need only be “reasonably” designed to achieve compliance — meaning the system does not have to be perfect and does not have to catch every violation every time — in the microcap liquidation world, FINRA does not seem to be too bothered by this legal distinction. It is, however, the job of FINRA defense counsel to remind FINRA of this critical fact.
Bottom line: if a broker-dealer is engaged in the high-volume liquidation of microcap stock for its customers in this regulatory environment, it must be prepared for intensive FINRA examination scrutiny and, if an illegal distribution of shares has occurred, very likely an enforcement action, notwithstanding the reasonableness and adequacy of the firm’s supervisory procedures.
David Chase, a FINRA lawyer, is a former SEC Prosecutor and the principal of the Law Firm of David R. Chase, P.A., a FINRA defense law firm located in Fort Lauderdale, Florida. The firm handles FINRA and SEC investigations and enforcement cases nationwide, as well as locally in Boca Raton and Miami, Florida. You may contact David Chase, Esq. for a confidential, cost-free consultation at: 800-760-0912, or by email at: firstname.lastname@example.org. The firm’s website is: securitiesfrauddefense.net.