BROKER PURSUED FOR FAILING TO DISCLOSE COMPENSATION FROM ISSUER
The SEC is pursuing enforcement against a broker found liable for violating the securities laws for failing to disclose compensation received from the issuer when soliciting customer purchases of the issuer’s stock. In the litigation, the SEC characterized the payments to the broker as “kickbacks” intended to inflate the price of the stock so that the payer, who controlled the issuer, could sell the stock at a higher price. In addition to violations of Sections 17(a) and 10(b), the SEC claimed that the broker violated Section 15(a)(1) of the Exchange Act because the receipt of “undisclosed kickbacks” fell “outside the scope of his association with a broker-dealer” and therefore was a sale of stock without BD registration.
OUR TAKE: Although this action occurred in a classic “pump-and-dump” scheme, the standards argued by the SEC remain the same in the fund distribution context. Failure to disclose payments from an issuer (or its sponsor) to a marketing agent will result in liability for both the payer and the payee.