National Securities Corporation (NSC) has been fined $9 million by FINRA, including $4.77 million in net profits the company made for underwriting 10 public offerings in which NSC sought to manipulate the market for the securities it was selling.
For failing to provide consumers who bought private placements from GPB Capital Holdings, LLC with significant information, FINRA also ordered NSC to pay more than $625,000 in damages. For this wrongdoing in addition to many other supervisory and operational infractions, FINRA also assessed a $3.6 million punishment.
Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement, stated that investors have a right to rely on a market free from false price movement caused by underwriters. “We will keep up our vigilance in enforcing the rules designed to prevent underwriters from influencing the market for a security offered, including boosting the offering price by insinuating aftermarket demand,” the company stated.
FINRA determined that NSC violated Rule 101 of Regulation M under the Securities Exchange Act of 1934 by illegally inducing or attempting to induce certain customers to purchase stock in the aftermarket of the offerings before they were completed between June 2016 and December 2018 while acting as an underwriter for three initial public offerings and seven follow-on offerings.
Underwriters are not allowed to try to persuade someone to make an aftermarket bid or purchase security during a limited period, according to Rule 101.
FINRA discovered that NSC broke Regulation M in connection with 10 offerings by doing one or more of the following during the restricted period for each offering:
- Putting a clear restriction on allocations, known as “tie-in agreements,” requiring branch managers or representatives to purchase a predetermined number of shares for their clients on the secondary market;
- Decided to approach clients who received allocations to ask them to buy more shares in the immediate aftermarket; and
- Threatened to cut representatives’ allocations if they didn’t agree to persuade their clients to join in the aftermarket.
NSC’s actions were intended to artificially boost aftermarket demand and support the price of the supplied securities, which tended to be lightly traded. The standing of the company and its capacity to generate future investment banking fees depended on how well the underwritten offers of NSC performed in the aftermarket.
The agreement settles numerous additional complaints against NSC, including that the company:
- Negligently failed to notify investors in two offerings connected to GPB Capital between April 2018 and July 2018 about delays in the issuer’s required public filings, including audited financial statements—for which FINRA has ordered the firm to pay those customers more than $625,000 in restitution;
- Failed to acquire locates for more than 33,000 short sale transactions between January 2005 and April 2020 as required by Rule 203(b)(1) of Regulation SHO under the Exchange Act;
- Between September 2013 and May 2017, failed to properly supervise one of its representatives by ignoring numerous warning signs that he was fabricating data on customers’ assets and suitability in order to get around NSC’s concentration level restrictions that applied to his recommendations for non-traded real estate investment trusts;
- Made false claims to FINRA regarding the sales of stock warrants it acquired in conjunction with a public offering in October 2019.
Without admitting or disputing the allegations, NSC agreed to the entry of FINRA’s conclusions in the settlement of this case.