Penny Stocks

Cantella & Co. Accused of Overcharging Client Commissions

December 11, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA), in an acceptance, waiver, and consent action (AWC), sanctioned brokerage firm Cantella & Co., Inc. (Cantella) over allegations that from approximately January 2006, to September 2011, the firm charged customers excessive commissions on approximately 1,270 equity transactions and 99 options transactions. FINRA also found that Cantella also failed to establish, maintain, and enforce an adequate supervisory system for the review of commissions charged.

Cantella has been a member of FINRA since 1983, the firm’s principal office is located in Boston, MA, and currently employs approximately 210 registered representatives working out of the principal office and 136 branch offices.

NASD Conduct Rule 2440 provides that all brokerage firms shall buy or sell at a security at a price which is fair, taking into consideration all relevant circumstances. The NASD established a policy that a mark-up of five percent may be deemed unreasonable and this policy applies equally to commissions on agency trades, and to mark-ups or mark-downs on principal transactions. In addition to the commission percentage other factors to be considered in determining the fairness of commission charges include: (i) the type of security involved; (ii) the availability of the security; (iii) the price of the security; (iv) the size of the transaction; (v) whether disclosure of the transaction cost was made to the customer prior to the trade’s execution; (vi) pattern of mark-ups; and (vii) the nature of the member’s business.

Why Your Broker Asking You to Sign A Comfort Letter is A Big Misconduct Red Flag

December 8, 2014 | by Staff Attorney

Your brokerage firm reviews customer accounts for misconduct and what does it find; bizarre and unreasonable trading activity. Maybe dozens of trades are being made every month or an account previously invested in plain vanilla mutual funds is now loaded up with speculative penny stocks and private placements. Whatever the cause, the firm has a system to monitor for unusual trading activity and sends the customer a letter. These letters go by many names including “happiness”, “comfort”, and more appropriately “Cover You’re A@!” (CYA).

A recent article by the Wall Street Journal explored how the purpose of these letters is to elicit an acknowledgment from the customer that they are satisfied with how the account is being handled in order to minimize future liability from a suit concerning the wrongful activity. To clarify, when a brokerage firm finds indications of possible misconduct their first action isn’t to stop the misconduct and help their client but to get the client to release the firm from liability.

Having reviewed dozens of these letters myself they are designed to be unreadable to the average investor and use industry jargon and legal lingo that is indecipherable to anyone but a securities attorney. These letters begin warmly enough by thanking you for your business and hoping that everything is well with you. Then the conversation becomes impersonal and maybe mentions that your investment choices have become more risky or aggressive recently. These sentences are code words for your investment objectives have completely changed from generating retirement income to you are now interested in potentially losing all your money with casino level risk. Maybe some information related to a “cost-to-equity ratio” or “turnover” is given. There is no explanation as to what these terms mean or why you should be concerned because they are just being provided for legal reasons that the customer should be unconcerned with.

FINRA and SEC Release Guidance on Avoiding Penny Stock Schemes

November 30, 2014 | by Staff Attorney

Recently, FINRA and the SEC’s Office of Investor Education and Advocacy issued an alert to warn investors that some low-priced “penny” stocks are being aggressively promoted to engage in investment fraud schemes. In many cases the stocks of dormant shell companies, businesses with nominal business operations, are susceptible to market manipulation. To help prevent these types of fraud, the SEC suspended trading in 255 dormant shell companies in February 2014.

The typical investment scheme concerns pump-and-dump frauds in which a fraudster deliberately buys shares of a very low-priced, thinly traded stock and then spreads false or misleading information to promote and inflate the stock’s price. The fraudster then dumps his shares causing a massive sell off and leaving his victims with worthless shares of stock. Among the more common schemes is a fraudsters who uses a dormant shell company to buy its shares and then claim that the company has developed a “new” product that has caused the price to jump higher or the company will announce new management.

The SEC provided 5 tips to avoid becoming a victim of a penny stock scheme.

FINRA Fines Feltl & Company $1 Million Conerning the Firm’s Penny Stock Business

October 22, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned brokerage firm Feltl & Company (Feltl) and fined the firm $1,000,000 concerning allegations that the firm, between January 2008, and February 2012. failed to comply with the suitability, disclosure, and record-keeping requirements for broker-dealers who engage in penny stock business. FINRA alleged that Feltl did not provide some customers with Securities and Exchange Commission (SEC) risk disclosure document two days prior to effecting a penny stock transaction in the customers’ accounts. failed to sufficiently supervise penny stock transactions for compliance with applicable rules and regulations, and failed to establish, maintain, and enforce written supervisory procedures for its penny stock business.

Feltl has eight branch offices located in Minnesota and Illinois, and approximately 113 registered representatives and has been a FINRA member since 1975.

The term “penny stock” generally refers to securities that trades below $5 per share, issued by a small company. Penny stocks often trade infrequently making it difficult to sell and price. Due to the size of the issuer, the market cap, the liquidity issues, and other reasons penny stocks are generally considered speculative investments. Consequently, the SEC requires broker-dealers effecting penny stock transactions to make a documented determination that the transactions are suitable for customers and obtain the customers’ written agreement to those transactions.

Broker Douglas Cmelik Sanctioned by FINRA Over Soliciting Penny Stock Purchases

July 10, 2014 | by Staff Attorney

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.

FINRA Sanctions Polar Investment Over Penny Stock Transactions

July 4, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) has sanctioned Polar Investment Counsel, Inc. (Polar Investment) concerning allegations from 2011 and 2012, a firm advisor of Polar recommended various low-priced securities (penny stocks) received a total of 14 purchase orders for those securities. FINRA alleged that the representative marked eight of the orders as “unsolicited,” meaning that the customer instructed the advisor to purchase the security without any prompting from the advisor. FINRA found that the unsolicited marking was incorrect given that the advisor had brought the securities to the customers’ attention. FINRA found that the mismarked orders caused the firm’s books and records to be inaccurate. In addition, FINRA determined that Polar Investments did not permit brokers to recommend penny stock transactions and mistakenly assumed that all 14 transactions were unsolicited and did not conduct a sufficient supervisory review of those transactions.

Polar Investment has been registered with FINRA since 1997, its main office is in Thief River Falls, Minnesota, and is also registered as an investment advisor with the SEC. Polar Investment has 18 registered representatives operating out of 12 branch locations.

FINRA alleged that throughout 2011 and 2012, Polar Investment’s written supervisory procedures prohibited representatives from recommending penny stocks to the firm’s customers. As a consequence, Polar Investments presumed that all penny stock transactions were unsolicited and the firm did not subject advisors to adequate supervisory review. Instead, FINRA found that the firm had the customer sign a penny-stock disclosure form. FINRA found that between June 2011 and April 2012, a Polar Investment advisor by the initials “MV” brought various penny stocks to the attention of some of his customers. The advisor’s actions, according to FINRA, resulted in at least 14 orders to buy those securities.

FINRA Sanctions Larry Steven Werbel for Selling Away and Other FINRA Violations

June 4, 2014 | by Staff Attorney

On March 10, 2014, Larry Steven Werbel submitted a Letter of Acceptance, agreeing to accept the sanctions handed down by the Financial Industry Regulatory Authority (FINRA) for alleged violations relating to the sale of penny stocks during his tenure at LPL Financial, LLC.

Larry Werbel entered the securities industry in 1976 as a Series 1, Registered Representative at Cigna Financial Advisors, Inc., where he was employed for twenty years. Thereafter, in February 2009, after a thirteen-year stint at FSC Securities Corporation, Werbel began working for LPL Financial, until his termination in February 2011.

During a three-week period, spanning from on or about October 26, 2010 through on or about November 17, 2010, while registered with LPL Financial, Werbel allegedly solicited eight customers to invest in QLotus Holdings Inc. (“QLTS”), a low-priced security that Werbel himself had previously purchased. According to FINRA, Werbel’s firm, LPL Financial, prohibited the solicitation of low-priced securities, such as QLTS, and so Werbel coded the QLTS sales as unsolicited despite the fact that they were all solicited. Werbel’s improper coding caused LPL’s books and records to be inaccurate in violation of NASD Rule 3110(a).

Three Rockwell Global Capital Brokers Accused of Securities Misconduct by Customers

April 3, 2014 | by Staff Attorney

Rockwell Global Capital LLC (Rockwell) brokers Robert E. Lee Jr. (Robert Lee), Douglas Guarino (Guarino), and Lawrence Lee (Lee) have been the subject of at least 29 combined customer complaints. All three brokers have been accused by clients of churning their accounts and making unsuitable investment recommendations.

Robert Lee first became registered in 1988. From March 2005, through November 2009, Robert Lee was registered through former FINRA member firm GunnAllen. Since November 2009, Robert Lee has been registered through Rockwell.

In August 2013, Robert Lee accepted a settlement with FINRA barring the broker from associating with any broker dealer. FINRA found that between September 25, 2008, and October 31, 2008, while Robert Lee was registered with GunnAllen, Robert Lee failed to follow a customer’s instructions regarding the purchase of three securities. FINRA also found that between September 2008, and at least December 2009, while Robert Lee was registered with two member firms, Robert Lee made material misrepresentations and omissions to a customer regarding the status of their investments. Specifically, FINRA found that Robert Lee misrepresented to the client that certain investments had earned $49,591 in dividends when in fact the investments did not exist and no dividends had been earned.

FINRA Alleges Royal Securities Company Had Numerous Supervisory Deficiencies – Part I

March 4, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Royal Securities Company (Royal Securities) concerning allegations Royal lacked adequate supervision and controls in several areas. FINRA alleged that Royal Securities failed to properly supervise two of its registered representatives, one of which utilized a unitary investment strategy for virtually all of his customers. FIRNA also found that other representative made unsuitable recommendations in three customer accounts.

FINRA alleged that between January 2010 and May 2012, representatives of Royal Securities recommended nontraditional exchange-traded funds (Non-Traditional ETFs) to customers without having a reasonable basis to do so. Further, FINRA found that Royal Securities failed to establish and maintain a supervisory system and training regarding the sale of Non-Traditional ETFs that was reasonably designed to comply with FINRA rules.

Royal Securities has been a FINRA member since September 1982 and the firm’s business lines include hedge funds, an investment advisory business, and a traditional brokerage business. Royal Securities has approximately 41 registered persons operating out of nine offices.

Thomas Oakes of Royal Securities Sanctioned Over Allegations of Unsuitable Investments

February 11, 2014 | by Staff Attorney

Broker Thomas C. Oakes (Oakes) has been suspended and fined by the Financial Industry Regulatory Authority (FINRA) concerning allegations from 2005 through May 2008, Oakes had engaged in unsuitable short term trading of low priced and/or speculative securities in the accounts of at least three customers causing substantial losses.

Oakes has been in the securities industry as a member of the FINRA since 1988. Since November 2003, Oakes has been a registered representative of Royal Securities Company (Royal). Oakes’ BrokerCheck disclosures reveal that at least 9 customer complaints have been filed against the broker. The customer complaints allege a variety of securities misconduct including securities fraud, unauthorized trading, unsuitable investments, churning, and breach of fiduciary duties.

According to FINRA, in 2005 or 2006, three customers opened new accounts at Royal with Oakes as their registered representative. Each of the customers New Account Form identified a primary investment objective of “Growth.” Royal defined a “Growth” investment objective as the goal of generating long-term capital growth through high quality equity investments consisting of large cap funds and a balanced portfolio of investment grade growth stocks with smaller positions in high grade corporate bonds. Growth investors should also be willing to assume more market risks than balance/conservative growth in return for yields that are expected to meet or slightly exceed the S&P 500 stock market index over the long run.