SEC Charges Firm Buying and Selling Convertible Notes with BD Registration Failures

The SEC charged a firm and its sole officer for failing to register as a dealer in connection with its "convertible notes business."

In a Complaint filed with the District Court for the Southern District of Florida, the SEC asserted that the firm acted as a securities dealer when it purchased notes or warrants from penny stock issuers, converted them into stocks at a large discount from the market price, and then sold the newly issued shares to public markets. The SEC alleged that the broker-dealer obtained "billions of shares" of newly issued common stock through converting the notes and warrants of 47 different issuers, and ultimately generated "millions of dollars" in profits. Additionally, the SEC alleged that the broker-dealer’s conduct was for its exclusive benefit and that the majority of the profits were transferred to the officer. As a result, the SEC charged that the broker-dealer and officer violated Exchange Act Section 15(a)(1) ("Registration and regulation of brokers and dealers").

Pending court approval, the firm and its sole officer will settle the SEC charges by agreeing to (i) cease and desist from further violations of Section 15(a)(1), (ii) pay disgorgement and prejudgment interest of $2,353,073.44, (iii) pay a civil penalty of $200,000, and (iv) five-year penny stock bars. The firm further agreed to "surrender all conversion rights in its currently held convertible notes, surrender for cancellation all unexercised warrants that it acquired in connection with convertible notes, and surrender for cancellation any shares it holds that were acquired by converting notes or exercising related warrants."