Utah Brokerage Firm Permanently Banned for Selling Unregistered Penny Stocks
Recently, FINRA expelled the broker-dealer ACAP Financial Inc. from any future dealing within the securities industry. The Salt Lake City-based brokerage firm was accused of unlawfully selling unregistered securities. More specifically, the firm sold billions of shares of four different penny stocks without properly registering them with the SEC. A complete account of the proceedings related to this case can be accessed using FINRA’s Disciplinary Actions Online search tool (case reference #2012030459101).
Understanding Microcap Stock Fraud
Microcap stocks (also known as penny stocks) are associated with small public companies, usually those that are worth less than $300 million in total. Most often, these stocks are priced at under $5 per share. As they typically trade infrequently, and in small amounts, it is far more difficult to generate a fair and accurate price for these securities. Additionally, the small market cap often makes these stocks subject to dramatic swings (in both directions), and, sadly, it also makes penny stocks a target for fraudsters.
The Case Against ACAP Financial
The Background
ACAP Financial Inc., along with its chief operating officer (COO) Kirk Lynn Ferguson and its Anti-Money Laundering Compliance Officer (AMLCO) Gary Hume, facilitated the unlawful liquidation of 3.3 billion shares of microcap stocks in two different client accounts. This type of penny stock liquidation is a common part of illegal ‘pump and dump’ schemes. A ‘pump and dump’ scheme refers to the fraudulent action that occurs when a party manipulates a stock price upwards, only to suddenly dump all of their shares.
Missing the Red Flags
Registered broker-dealers have a legal duty to avoid facilitating financial misconduct by other parties, including their own clients. In this case, a Florida corporation referred to only as ‘BL’ opened a brokerage account with ACAP Financial. An individual referred to as ‘VB’ was the only contact person listed on this account. ACAP failed to perform proper due diligence on this account. Additionally, as red flags started to go up, ACAP Financial, and its executive officers, took no action to stop this account from liquidating a massive amount of penny stock shares. Generally, BL/VB would:
- Deposit large quantities of thinly traded securities, with very low prices, into their brokerage account;
- Immediately dump all of the shares of those micro cap stock; and
- Wire all of the proceeds out of the account.
As it turns out, the holder of the trading account happened to be a person who was barred from the securities industry because he previously committed penny stock fraud. In all, ACAP Financial brought in nearly $140,000 in ill-gotten commissions related to these penny stock trading accounts. The Utah brokerage firm’s failure to establish and implement procedures that could have detected and stopped this fraudulent activity is a direct violation of FINRA Rule 3310. This rule requires all members to develop competent anti-money laundering monitoring programs.
Were You a Victim on Investment Fraud?
The securities fraud attorneys at Carlson & Associates, P.A. are ready to help. To get legal assistance now, please reach out to our firm today at (305)-372-9700. Our office is located in Miami, and we represent penny stock fraud victims throughout South Florida, including in Palm Beach County and Broward County.
Resources:
finra.complinet.com/en/display/display_main.html?rbid=2403%20&element_id=8656
disciplinaryactions.finra.org/Search/ViewDocument/66971