Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) has sanctioned broker Douglas Cmelik(Cmelik) concerning allegations that Cmelik improperly marked order tickets for penny stock purchases as “unsolicited” when the purchases were solicited. Cmelik’s conduct allegedly violated NASD Conduct Rule 3110 and FINRA Rule 2010.
Penny stocks are securities that carry significant investment risks. A “penny stock” is defined by the Securities and Exchange Commission (SEC) as a security issued by a company with less than $100 million in market capitalization. Penny stocks are also often called “low-priced securities” because they typically trade at less than $5 per share. Many penny stocks are very thinly traded and consequently liquidity for the stock can vary day-to-day.
Penny stocks are typically not suitable for many retail investors and consequently many firms prohibit their advisors from soliciting investments in these issuers. First, penny stocks may trade infrequently or very thinly making it difficult to liquidate a penny stock holding. Consequently, penny stocks often fluctuate wildly day-to-day. Penny stocks are often the target of unscrupulous individuals for fraudulent purposes. One scheme employed is the “pump and dump” scheme. In a pump and dump scheme, an unfounded hype for a penny stock the pumper already owns is created to boost the stock price temporarily. The penny stock pumper then sells their shares for a profit causing intense downward pressure on the penny stock and the security quickly loses value. The defrauded investors suffer huge losses as a result of the scheme.
According to FINRA, from April 2010 through January 2011, while Cmelik was associated with Ameriprise Financial Services, Inc. (Ameriprise)., 65 of Cmelik’s clients placed 133 orders to purchase penny stocks. FINRA found that Cmelik marked the order tickets for these purchases as ”unsolicited” even though he solicited these purchases. When a representative marks orders as “unsolicited,” it means that the customer instructed the advisor to purchase the security without any prompting from the advisor. However, in these instances, FINRA found that the unsolicited marking was incorrect given that the advisor had brought the securities to the customers’ attention. FINRA also found that Cmelik’s failure to mark these penny stock purchases as solicited caused Ameriprise’s books and records to be inaccurate. In addition, according to FINRA, Ameriprise prohibited its registered representatives from soliciting purchases of penny stocks to customers under the firm’s policies and procedures.
Cmelik first became registered with FINRA in January 1997 and through March 2011, Cmelik was associated with Ameriprise. From March 2011 through May 2011, Cmelik was associated Ameritas Investment Corp. (Ameritas). From April 2012 through October 2012, Cmelik was associated with NDX Trading, Inc. In addition, according to Cmelik’s BrokerCheck disclosures, the advisor has had at least five customer complaints filed against him, is currently under a regulatory investigation, and has had one financial judgment filed against him. At least four of the customer complaints alleged that Cmelik misrepresented the purchase of penny stocks.
The attorneys at Gana Weinstein LLP are experienced in representing investors in securities arbitration to concerning various investments including unsuitable penny stocks. Our consultations are free of charge and the firm is only compensated if you recover.