A Finra hearing panel has censured C.L. King & Associates Inc., an Albany, N.Y.-based broker-dealer, and fined it $750,000 for negligently making material misrepresentations and omissions to issuers in connection with the firm's redemptions of debt securities on behalf of a hedge fund customer.
According to the hearing panel decision, the manager of the hedge fund paid terminally ill patients $10,000 to open joint accounts at C.L. King, with the fund being a joint tenant with rights of survivorship. The hedge fund's strategy involved using the accounts to purchase discounted corporate bonds that contained a survivor option, or "death put," allowing the hedge fund to redeem the investments from issuers – through C.L. King – for the full principal amount before maturity upon the death of the ill person. The manager and fund obtained referrals to open joint accounts from a hospice in New Jersey.
The hearing panel found that C.L. King had an obligation to disclose to issuers during the redemption process that terminally ill joint tenants were beneficial owners of the investments because the hedge fund required them to sign side agreements in which they agreed to give up their ownership rights to the assets in the joint accounts.
Separately, the hearing panel found that C.L. King and Gregg Alan Miller, its anti-money-laundering compliance officer, failed to establish and implement a reasonable AML program and failed to adequately respond to red flags related to the liquidation of billions of shares of penny stocks indicative of potentially suspicious activity by two customers. The decision resolves charges brought by the Financial Industry Regulatory Authority Inc.'s enforcement department in April 2016, for which Mr. Miller was suspended in a principal capacity for six months and fined $20,000.
From 2009 to 2014, the firm sold billions of shares in penny stocks on behalf of two customers. One of the customers, a bank based in Liechtenstein, sold 41 million of shares of 40 penny stocks generating more than $4.8 million in proceeds and the other customer sold more than 11 billion shares in 138 stocks for proceeds of more than $14 million. The hearing panel found that C.L. King and Mr. Miller failed to tailor its AML program to the risks presented by its penny stock business and did not monitor the customers' trading activity for red flags indicative of potential money laundering.