The Financial Industry Rgulatory Authority said Monday it was fining Aegis Capital $950,000 for improper sales of unregistered penny stocks, related supervisory failures and for its failure to implement anti-money laundering policies and procedures. The sales, conducted about five years ago, totaled $24.5 million and generated $1.1 million in commissions.
Two executives who served as chief compliance officers are being suspended for 30 and 60 days and must pay fines of $5,000 and $10,000, respectively. The regulatory group also has ruled that Aegis President & CEO Robert Eide is under suspension for 15 days and is being fined $15,000 for his failure to disclose more than $640,000 in outstanding liens.
“Firms who open their doors to penny stock liquidators must have robust systems and procedures to ensure strict adherence to the registration and AML rules given the significant risk of investor fraud and market manipulation,” said Brad Bennett, executive vice president and chief of enforcement for FINRA, in a press release. “The compliance officers sanctioned in this case were directly responsible for supervising sales of restricted securities but failed to conduct a meaningful inquiry in the presence of significant red flags indicating the sales could be illicit distributions of unregistered stocks.”
According to FINRA, an individual barred by the National Association of Securities Dealers in 2004 — referred to in FINRA documents as ML — introduced an Irish citizen and attorney, HO, who was based in Turks and Caicos in 2008, to Aegis. Four entities based in the islands opened accounts with Aegis in 2008, with the Irish attorney serving as their officer at times; the four entities shared the same address.
As regulators moved to stop ML from trading and as Aegis advised its clearing firm to revoke ML’s trading authority, Aegis allowed ML to direct trades in several accounts, according to FINRA. Other Turks and Caicos-based entities opened accounts with Aegis at the time, with HO acting as an officer for them.
These accounts and others, which were opened by individuals and entities connected to ML (including his brother-in-law), sold unregistered shares and quickly obtained the proceeds. They represented the majority, but not all of the unregistered shares that resulted in the FINRA fines announced Monday. Other entities involved in the matter include China Crescent and Numobile.
Further details on the matter can be found in the FINRA complaint.
FINRA’s investigation found that the securities violations resulted, at least in part, from the supervisory failures of Aegis and its two CCOs, Charles Smulevitz and Kevin McKenna, during the period of the liquidations.
(Smulevitz was with Aegis from 2009 to 2012, when he was terminated, and is now working for another FINRA member; McKenna started with Aegis in 2010 and is still with the firm.) “Aegis did not have a supervisory system reasonably designed to prevent the distribution of unregistered securities, and further failed to conduct reasonable and meaningful inquiries of the circumstances surrounding the sales of a total of 10 penny stocks by more than a dozen customers, according to FINRA.
Plus, the regulatory group says two CCOs “did not adequately implement” the firm’s AML program and “failed to reasonably detect and investigate red flags indicative of potentially suspicious transactions.”
Specifically, Aegis did not investigate the deposits of unregistered securities, followed shortly thereafter by liquidations. “These failures evidenced the firm’s inadequate system to detect, investigate and, where appropriate, report suspicious activity to the Financial Crimes Enforcement Network,” FINRA said.
In general, securities must be registered with the Securities and Exchange Commission so that potential investors can review facts about the issuers. FINRA says that from April 2009 to June 2011, Aegis Capital liquidated nearly 3.9 billion shares of five penny stocks that were not registered with the SEC and not exempt from registration.
In settling this matter, the respondents neither admitted nor denied the charges but consented to FINRA’s findings.
“Aegis has agreed to settle with FINRA with respect to activity that occurred years ago,” the company said in a statement shared with ThinkAdvisor.
“For over 30 years Aegis has proudly and faithfully served its public customers’ investment needs and looks forward to continuing to do so for decades to come,” the firm said. “Aegis has been a leader in raising capital for innovative companies whose focus is in developing novel and innovative solutions in the health care, life sciences, biotechnology and technology sectors. Aegis remains committed to assisting these companies to achieve their goals and to bring these solutions to the public.”
According to a FINRA disciplinary hearing in October 2014, Eide had seven tax liens totalling $1.1 million filed against him by the IRS and the State of New York between August 2002 and May 2011 and failed to disclose these liens in his regulatory documents, despite the fact that he earned a law degree in taxation in 1979 and served as the founder, president, CEO and chief investment officer of Aegis since 1981.
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