The Securities and Exchange Commission charged three New York-based brokers with making unsuitable recommendations that resulted in substantial losses to customers and hefty commissions for the brokers. One of the brokers agreed to pay more than $400,000 to settle the charges.
An SEC examination of the firm Alexander Capital L.P. detected potential misconduct among certain brokers, and the ensuing investigation has led to the filing of an SEC complaint against William Gennity and Rocco Roveccio. The SEC also issued an order against Laurence Torres.
The SEC's complaint alleges that Gennity and Roveccio recommended investments that involved frequent buying and selling of securities without any reasonable basis to believe their customers would profit. According to the complaint, since customers incur costs with every transaction, the price of the security must increase significantly during the brief period it is held in an account for even a minimal profit to be realized.
The SEC further alleges that Gennity and Roveccio churned customer accounts, engaged in unauthorized trading and concealed material information from their customers – namely that the transaction costs associated with their recommendations (commissions, markups, markdowns, postage, fees and margin interest) would almost certainly outstrip any potential monetary gains in the accounts. According to the SEC's complaint, customer losses totaled $683,000 while Gennity and Roveccio received approximately $280,000 and $206,000, respectively, in commissions and fees.
"We have no tolerance for unscrupulous brokers, and our examiners and enforcement investigators are working together to proactively catch insidious practices before they spread and impact even more customer accounts," said Andrew M. Calamari, director of the SEC's New York Regional Office and co-chair of the Enforcement Division's Broker-Dealer Task Force, in a statement.
The SEC's litigation against Gennity and Roveccio will proceed in federal district court in Manhattan. Meanwhile, the SEC's order against Torres finds that he had no reasonable basis to believe it was suitable to recommend a high-cost pattern of frequent trading that gave his customers virtually no chance of making even a minimal profit. Torres also engaged in churning and made unauthorized trades. Without admitting or denying the findings, Torres agreed to be barred from the securities industry and penny stock trading, and he must pay $225,000 in disgorgement plus $25,700 in interest, and a $160,000 penalty.
Analyst Barred for Cashing In on His Research
The Securities and Exchange Commission charged a stock market analyst with insider trading prior to the publication of research reports and articles he authored with the false disclaimer that he wasn't trading in the companies being covered.
He agreed to settle the charges and be barred for life from trading in penny stocks.
The SEC alleges that Jason Napodano, who headed a division called Zacks Small Cap Research within a larger investment research firm, misled investors in penny stocks by representing that he wasn't trading or holding positions in the companies he was writing about while secretly trading the same stocks based on nonpublic information about the publication date of his research.
In an effort to evade detection, Napodano allegedly limited his profits from each illegal trade by taking small positions and closing the positions shortly after his reports and articles were published.
In addition to a permanent penny stock bar, Napodano agreed to pay full disgorgement of his insider trading profits of $143,800, plus interest of $17,600 and a penalty of $143,800. The settlement is subject to court approval.
"Retail investors seek honest rather than conflicted research to help them make decisions about which stocks to buy and trade. It is unacceptable for analysts to represent they have no stake in the companies they're writing about while secretly cashing in on trades in those stocks," said Steven Peikin, co-director of the SEC's Enforcement Division, in a statement.
The SEC also charges a pair of investment bankers who, along with Napodano, allegedly traded on nonpublic information that they and Napodano shared about certain small-cap issuers. According to the SEC's complaint, Bilal Basrai and Bryce Stirton worked at Chicago-based brokerage firm LBMZ Securities and together with Napodano breached the duties of trust and confidentiality owed to microcap issuers that retained Zacks Small Cap Research to provide sponsored research or LBMZ to act as a financial advisor.
Basrai agreed to settle the charges by paying disgorgement of his insider trading profits of $39,600 plus interest of $4,600 and a penalty of $39,600. Stirton agreed to settle the charges without admitting or denying the allegations by paying disgorgement of his insider trading profits totaling $2,200 plus interest of $257 and a penalty of $2,200. Basrai and Stirton also agreed to be barred from trading penny stocks and from working in the securities industry, with Stirton having the right to reapply after five years.
In a parallel action, the U.S. Attorney's Office for the Northern District of Illinois today announced criminal charges against Napodano and Basrai.
LBMZ Securities separately agreed to be censured and pay a $240,000 penalty without admitting or denying the SEC's findings that the firm failed to enforce policies and procedures designed to prevent its employees from misusing nonpublic information.
SEC Charges Firm and Its Owner With Lying About Experience and Past Performance
The SEC charged an investment advisory firm and its sole owner and manager with fraud for lying numerous times to investors while raising money for a hedge fund.
The SEC's complaint alleges that, from approximately November 2013 to April 2014, Moses Investment Company LLC (MIC), and its principal, Michael Moses, raised approximately $1 million for a private fund they managed — WAKE Fund I, LP — by touting Moses' past experience and performance.
