The Financial Industry Regulatory Authority has sanctioned broker-dealer National Securities Corporation approximately $9 million, including disgorgement of $4.8 million in net profits received for underwriting 10 public offerings in which it “attempted to artificially influence the market for the offered securities.”
FINRA also ordered the firm to pay more than $625,000 in restitution for failing to disclose material information to customers who purchased GPB Capital Holdings’ private placements. Specifically, between April 2018 and July 2018, the firm “negligently omitted” to tell investors in two GPB offerings about delays in the issuer’s required public filings, including its audited financial statements.
In addition, FINRA imposed a $3.6 million fine for this misconduct and various other supervisory and operational violations.
“Investors are entitled to rely on a market that is free from artificial price movement created by underwriters,” said Jessica Hopper, executive vice president and head of FINRA’s Department of Enforcement. “We will continue to vigilantly enforce rules designed to prevent underwriters from influencing the market for an offered security, including supporting the offering price by creating a perception of aftermarket demand.”
FINRA found that between June 2016 and December 2018, National Securities, while acting as an underwriter for three initial public offerings and seven follow-on offerings, violated Rule 101 of Regulation M by unlawfully inducing or attempting to induce certain customers to purchase stock in the aftermarket of the offerings prior to their completion.
FINRA found that National Securities violated Regulation M by engaging in some combination of the following misconduct during each offering’s restricted period:
- Expressly conditioning allocations on a branch manager’s or representative’s agreement to buy a specific number of shares in the aftermarket for the branch’s or representative’s customers, known as tie-in agreements
- Agreeing to solicit customers who received allocations to purchase additional shares in the immediate aftermarket
- Threatening to reduce allocations to representatives who would not agree to solicit their customers to participate in the aftermarket
FINRA claims that National Securities’ conduct was aimed at artificially stimulating demand and supporting the price of the offered securities, which tended to be thinly traded, in the immediate aftermarket. The aftermarket performance of its underwritten offerings was important to the firm’s reputation and ability to generate future investment banking revenue.
The settlement resolves multiple other charges, including that the firm:
- Between January 2005 and April 2020, failed to obtain locates for more than 33,000 short sale transactions
- Between September 2013 and May 2017, failed to reasonably supervise one of its representatives by failing to respond to multiple red flags that he was falsifying information about customers’ assets and suitability information in order to avoid NSC’s limits on concentration levels that applied to his non-traded real estate investment trust recommendations;
- Made inaccurate representations to FINRA concerning the sales of stock warrants it received in connection with an October 2019 public offering.
In settling this matter, National Securities consented to the entry of FINRA’s findings without admitting or denying the charges.
National Securities Corporation has been a FINRA member since 1947. The firm conducts a general securities business and has approximately 574 registered representatives and 119 branch offices.