National Securities Corp.
FINRA fined National Securities Corporation (“NSC”) approximately $9 million, including disgorgement of $4.77 million in net profits the firm received for underwriting 10 public offerings in which NSC attempted to artificially influence the market for the offered securities.
FINRA also ordered NSC to pay more than $625,000 in restitution for failing to disclose material information to customers who purchased GPB Capital Holdings, LLC private placements. In addition, FINRA imposed a $3.6 million fine for this misconduct and various other supervisory and operational violations.
FINRA found that between June 2016 and December 2018, NSC, while acting as an underwriter for three initial public offerings and seven follow-on offerings, violated Rule 101 of Regulation M under the Securities Exchange Act of 1934 by unlawfully inducing or attempting to induce certain customers to purchase stock in the aftermarket of the offerings prior to their completion.
Rule 101 prohibits underwriters, during a restricted period, from attempting to induce any person to bid for or purchase any offered security in the aftermarket.
FINRA found that NSC violated Regulation M in connection with 10 offerings 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; and
Threatening to reduce allocations to representatives who would not agree to solicit their customers to participate in the aftermarket.
NSC’s 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 NSC’s underwritten offerings was important to the firm’s reputation and ability to generate future investment banking revenue.
The settlement resolves multiple other charges against NSC, including that the firm:
Between April 2018 and July 2018, negligently omitted to tell investors in two offerings related to GPB Capital about delays in the issuer’s required public filings, including audited financial statements—for which FINRA has ordered the firm to pay restitution of more than $625,000 to those customers;
Between January 2005 and April 2020, failed to obtain locates for over 33,000 short sale transactions as required by Rule 203(b)(1) of Regulation SHO under the Exchange Act;
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; and
Made inaccurate representations to FINRA concerning the sales of stock warrants it received in connection with an October 2019 public offering.
