Aegis Capital Corp., a New York-based broker-dealer with roughly 415 registered brokers, has agreed to pay $950,000 as part of a settlement with the Financial Industry Regulatory Authority Inc. over allegations of improper sales of billions of shares of unregistered penny stocks and anti-money-laundering supervisory lapses.
Two former chief compliance officers at the firm also were suspended and fined over the charges. In addition, as part of a separate action also announced Monday, the firm's president and chief executive, Robert Eide, was suspended for 15 days and fined $15,000 for failing to disclose more than $640,000 in outstanding liens.
The penny stock charges stem from a complaint filed against Aegis last August, in which Finra said the firm had facilitated a penny stock scheme that netted $24.5 million in profits for customers and $1.1 million in commissions for the firm.
From April 2009 to June 2011, Aegis liquidated some 3.9 billion shares of five unregistered penny stocks that were not exempt from registration requirements, Finra said. Most securities have to be registered with the SEC “to ensure that potential investors are able to receive essential facts about the issuers,” according to Finra's statement.
The firm and the compliance officers at the time also ignored red flags associated with the transactions, according to the regulator. For example, the customers were referred to Aegis by a former broker who had earlier been barred from the industry by Finra and was later charged by the SEC with abetting securities fraud, Finra alleged. The broker, whom Finra referred to by the initials ML, was also able to control activity in several of the accounts, according to the settlement.
“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,” Brad Bennett, Finra's chief of enforcement, said in a statement. “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.”
One of the former chief compliance officers at Aegis, Charles D. Smulevitz, who is now registered with another broker-dealer, Laidlaw & Co. (UK) Ltd., agreed to a 30-day suspension from serving as a supervisory principal and $5,000 fine. The other chief compliance officer, Kevin C. McKenna, who is still at the firm but not in a compliance role, agreed to a $10,000 fine and 60-day suspension from a supervisory role.
Mr. Eide, Mr. Smulevitz and Mr. McKenna consented to the fine without admitting or denying Finra's accusations.
Michael H. Ference of Sichenzia Ross Friedman Ference, which represented the three and Aegis, said last year that the firm planned to contest whether the securities were required to be registered and that from 2009 to 2011, Finra staff had not identified any deficiencies in Aegis' AML program.
In an updated statement, Mr. Ference noted the accusations were from several years ago and pointed to Aegis' history in the industry.
"Aegis has agreed to settle with Finra with respect to activity that occurred years ago," he said in an emailed statement. "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."
Regarding Mr. Eide's settlement, Mr. Ference said the liens were all satisfied years ago before Finra began its investigation, and that Mr. Eide had not been aware of the liens at the time or that he was required to disclose them.
Regulators' targeting of individuals, particularly compliance officers, has been a hotly contested issue at the SEC over the past year.
Last month, the former head of the private client group at Oppenheimer, Robert Okin, agreed to a bar and to pay $125,000 to settle SEC charges of failing to properly supervise sales of unregistered penny stocks. A former branch manager and ex-broker at the firm were also penalized.