BDs to Pay $2.5 Million for Failing to Stop Penny Stock Fraud

Two related broker-dealers agreed to pay over $2.5 Million to settle charges that they failed to stop penny stock fraud.  The SEC alleges that three institutional clients laundered 247 unregistered penny stocks through accounts at the respondent.  The SEC accuses the firms of failing to ensure that the shares were either registered or that the unregistered resales legitimately relied on exemptions from registration.  The SEC cited several red flags, including unusual trading patterns, and faulted the firms for merely relying on representations or lawyer opinions based on such representations.  The SEC also issued a related Risk Alert and FAQs.

OUR TAKE: The SEC continues its enforcement strategy of holding “gatekeepers” accountable for policing the markets.  In this case, the SEC makes clear that broker-dealers cannot allow their firms to be used to launder unregistered penny stocks.

 

http://www.sec.gov/litigation/admin/2014/33-9662.pdf

http://www.sec.gov/about/offices/ocie/broker-dealer-controls-microcap-securities.pdf

http://www.sec.gov/divisions/marketreg/faq-broker-dealer-duty-section4.htm