FINRA Red Flags l Securities Lawyer 101 Blog
The Financial Industry Regulatory Authority (“FINRA”) recently identified certain red flags in connection with a disciplinary action against Gar Wood Securities LLC.
FINRA’s allegations centered on Gar Wood’s alleged facilitation of sales of unregistered securities in violation of the Section 5 of the Securities Act of 1933, as amended (the “Securities Act”).
According to FINRA, Gar Wood failed to identify certain suspicious activity in a customer’s account that should have warranted the filing of FINRA Form SAR-SF.
Over a two-year period, according to FINRA, the client deposited certificates for penny stocks issued by 24 different companies into its Gar Wood brokerage account, immediately liquidated the shares and withdrew the proceeds by wire transfer. On at least three occasions, those certificates should have borne a restrictive legend, but did not.
Currently, the regulators are showing an increased interest in sales of unregistered stock. They typically occur in the course of major penny stock promotions. Then, and often at other times, the sellers are holders of convertible debt who dump their stock using an attorney opinion letter before the debt has been properly “aged.” That is what FINRA says happened in the Gar Wood case.
The FINRA Red Flags
FINRA identified a number of red flags that it alleges Gar Wood failed to identify and act upon:
● The client opened a new account and delivered physical certificates representing a large block of thinly traded or low priced securities;
● The client had a pattern of depositing physical share certificates, immediately selling the shares and then wiring out the proceeds of the sale;
● The client deposited certificates that were recently issued or represented a large percentage of the float for the security;
● The certificates did not bear a restrictive legend which was inconsistent with the date the customer acquired the shares or the nature of the transaction in which the shares were acquired;
● The account had limited assets but received an electronic transfer or journal transaction of large amounts of low priced unlisted securities;
● The SEC filings of the issuers whose shares were deposited were not current, were incomplete or not made;
● Some of the shares deposited were for shares of shell companies; and
● The original clearing firm for the account closed the account after it identified several red flags related to the client.
Gar Wood, a small broker-dealer, was censured by FINRA and fined $75,000 for its negligence. For other brokerages accepting deposits of penny stock certificates, the red flags identified by FINRA can serve as a great checklist.
The red flags identified by FINRA serve as a great checklist for brokers accepting deposits of penny stock issuers.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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