Finra Supervision and Unregistered Sale Sanctions Upheld

Finra Supervision and Unregistered Sale Sanctions Upheld

World Trade Financial Corp., et. al., Exchange Act Rel. 66114, January 6, 2012.

World Trade, its president Rodney Michel, its supervisor of trading Jason Adams and Frank Brickell a rep appealed Finra sanctions. Finra found World Trade and Brickell sold unregistered stock and that Michel and Adams failed to supervise Brickell. It also found that World Trade had inadequate supervisory procedures.

World Trade was fined $45,000, Brickell $15,000, Michael $30,000 and Adams $20,000. Brickell was suspended for 30 days, Michel for 45 days, and Adams for 30 days.

The Commission upheld the sanctions.

Over a three month period World Trade sold 2.3 million shares of a thinly traded penny stock on behalf of three customers for proceeds totaling $295,000. Brickell received about $9,200 in commissions. This distribution was not registered with the Commission.

In assessing whether or not stock sold by customers was "free trading" the firm relied heavily on whether or not certificates had restrictive legends. The stock in question was subject to a spam based email campaign.

This was a classic penny stock pump and dump scheme. Brickell admitted that he knew "or should have known" that the company had recently undergone a reverse merger and that it had only begun to publicly trade just before his customers initiated their sales.
World Trade, Brickell, Michel, and Adams all claimed that they relied on the transfer agent to make sure that the shares were not part of an unregistered distribution.

This is a significant case. It reiterates the long standing requirement that broker-dealers have an independent duty to investigate and ascertain that in connection with customer sales of little known thinly traded stocks an unregistered distribution is not taking place. The "broker" registration exemption in Exchange Act Section 4(4) is not available  "if the broker knows or has reasonable grounds to believe that the selling customer's part of the transaction is not exempt [from registration].... when a dealer is offered a substantial block of a little-known security ... where the surrounding circumstances raise a question as to whether or not the ostensible sellers may be mere intermediaries for controlling persons or statutory underwriters, then searching inquiry [by the broker-dealer] is called for."

Read more commentary on SEC administrative opinions at SEC Tea Party, a blog by Robert Fusfeld.

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