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.
