Brokerage Firm Settles FINRA Charges for Attempting to Artificially Influence Market Prices

A broker-dealer settled FINRA charges for attempting to influence the market for securities offered by the firm's corporate affiliates and investment banking clients.

In a Letter of Acceptance, Waiver and Consent, FINRA found that the brokerage firm engaged in behavior intended to manipulate the market for 10 offerings sold to clients by (i) persuading them to purchase shares of the offered security in the aftermarket during a restricted period, (ii) attempting to recoup selling concessions from representatives whose clients sold shares of the offerings within 30 days of the offer and (iii) failing to provide written notice to clients of potential conflicts of interest in connection with the purchases of securities that were issued by several firm affiliates.

Additionally, FINRA found that the firm (i) did not tell investors that the issuers failed to timely make required filings with the SEC, including filing audited financial statements; (ii) permitted certain warrants to be sold within the first 360 days despite assuring FINRA it would not do so; (iii) failed to address red flags that caused the firm to record inaccurate increases to the value of client assets to justify the suitability of the investment in those assets and (iv) failed to enforce a supervisory system reasonably designed to achieve compliance with the locate requirements of Regulation SHO in connection with short sale offerings.

As a result, FINRA found that the firm violated:

  • Rule 101 of Regulation M ("Activities by distribution participants");

  • FINRA Rule 2010/NASD Rule 2110 ("Standards of Commercial Honor and Principles of Trade"), Rule 2262 ("Disclosure of Control Relationship with Issuer"), Rule 3110/NASD Rule 3010 ("Supervision"), Rule 4511 ("Books, Records and Reports: General Requirements") and Rule 5131(c) ("New Issue Allocations and Distributions");

  • Rule 15c1-5 of the Exchange Act ("Disclosure of control"); and

  • Rule 203(b)(1) of Regulation SHO ("Borrowing and delivery requirements").

To settle the charges, the broker-dealer agreed to (i) a censure, (ii) a fine of $3,600,000, (iii) disgorgement of $4,770,000 and (iv) partial restitution of $625,480 plus interest. The partial restitution was paid to clients who had not previously settled with the firm, and only in the amount equal to the commissions received by the firm.

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