SEC, FINRA Enforcement: Reps Sold ETFs They Didn’t Understand

Houston American Energy Corp. and its CEO, John Terwilliger, were charged by the SEC for fraudulently claiming that a Colombian exploration concession in which Houston American only owned a fractional interest held between 1 billion and 4 billion barrels of oil reserves, and that the reserves were worth more than $100 per share to Houston American’s investors. The estimates were not only completely unreasonable, they were falsely attributed to the concession’s operator, whose actual estimates were much lower.

The agency also charged stock promoter Kevin McKnight and his firm Undiscovered Equities Inc., who were paid by Houston American to spread its fraudulent claims about the oil-and-gas concession project in Colombia.

The SEC said that the claims were made during several months in late 2009 and early 2010. During this time, Houston American raised approximately $13 million in a public offering and saw its stock price increase from less than $5 per share to more than $20 per share.

Despite the firm’s glowing predictions, it drilled multiple unsuccessful wells at the concession from 2010 to 2012, and withdrew from the operation in early 2013 without recovering any oil. Its stock price tanked, and it now trades for approximately 40 cents per share. That’s a market capitalization loss of approximately $600 million since it peaked in April 2010. FINRA Censures, Fines Firm on Excessive Markups

Chicago-based Howe Barnes Hoefer & Arnett Inc. was censured by FINRA and fined $200,000 for charging excessive markups on zero-coupon municipal bonds and U.S. Treasury and Agency Separate Trading of Registered Interest and Principal Securities (STRIPS). The firm neither admitted nor denied the findings, but has already made voluntary restitution to customers of $64,231.16, the total amount of the excessive markups.

According to FINRA, the trades were placed through another FINRA-registered broker-dealer that owns a nonvoting 20% preferred stock interest in the firm. The firm was unaware of the number or percentage of the other firm’s markups. As a result, firm customers paid excessive markups in municipal bond and STRIPS transactions.

FINRA found that the firm did not reasonably supervise the markups charged for these transactions, and also failed to reasonably supervise the communications between its brokers and the other firm’s salesman. In addition, it failed to reasonably enforce its fair pricing reviews in connection with the trades; that resulted in the excessive markups. It also failed to reasonably monitor the appropriateness of the trades at the other firm, in light of the potential conflict of interest in directing trades to an entity that held a noncontrolling interest in it.

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Check out FINRA’s 5 Biggest Fine Categories in First Half of 2014 on ThinkAdvisor.