Being a financial analyst and author, my goal is to simplify a major occurrence that has significantly impacted the financial technology sector for all to grasp. Recently, National Securities Corporation, also known as NSC, was subjected to a hefty penalty of $9 million by the Financial Industry Regulatory Authority (FINRA). The startling aspect for the industry was the disclosure that out of this fine, $4.77 million constituted unlawful earnings NSC acquired through the manipulation of market prices during the underwriting of public offerings, aiming to benefit themselves.
Now, let’s talk straightforwardly about the wrongdoing here. When NSC sold private placements from GPB Capital Holdings, LLC, they failed to give buyers critical information. This misstep has now cost them more than $625,000 in damages as mandated by FINRA. Then there’s the hefty $3.6 million fine for a slew of supervisory and operational failures on NSC’s part.
Jessica Hopper, a top executive at FINRA, asserted that investors deserve a market untainted by false price manipulation by underwriters. She wisely noted, “The integrity of the market is fundamental to its function.” It’s a reminder that echoes the words of billionaire Warren Buffett: “It takes 20 years to build a reputation and five minutes to ruin it.”
According to FINRA’s investigation, the fines are rooted in NSC violating Rule 101 of Regulation M under the Securities Exchange Act of 1934. To put it plainly, they were essentially tempting certain customers to buy stock in what we call the ‘aftermarket’, before they had even wrapped up the initial offerings. Between June 2016 and December 2018, while NSC underwrote three initial public offerings and seven follow-on offerings, they were caught red-handed indulging in these unfair practices.
For those wondering about Rule 101, it’s a regulation that says underwriters, like NSC, can’t solicit people to buy or even hint at the need for additional purchases during a specific restriction period.
Let’s delve into the specifics of NSC’s violations during these offerings. They did things such as:
- Strictly limiting allocations—aka “tie-in agreements”—pressuring branch managers or reps to buy a certain number of shares on the secondary market for their clients;
- Strong-arming clients who got allocations to buy more shares right after they hit the market; and
- Threatening their own representatives with slashed allocations unless they got their clients to buy into those aftermarket shares.
Such moves were calculated to falsely prop up aftermarket demand and support the securities’ prices, usually for stocks that didn’t see much action. And why did NSC bother? Well, the performance of these underwritten offerings in the aftermarket was crucial for its reputation and future ability to rake in investment banking fees.
This settlement isn’t just about these offerings, though. NSC has a laundry list of additional wrongdoing, including:
- The negligent omission of telling investors about delays in public filings, including audited financials, in two offerings connected to GPB Capital;
- Failing to secure ‘locates’ for over 33,000 short sale transactions as per rules;
- Ignoring clear red flags that one of its representatives was fudging customer data to sidestep restrictions on non-traded REITs; and
- Fibbing to FINRA about how it sold stock warrants it got from an offering.
At the end of the day, NSC neither admitted nor denied these findings but agreed to the fines and the official record of FINRA’s conclusions.
Now, here’s a financial fact that’s worth absorbing: Did you know that bad financial advisors who incur fines or sanctions often have a track record that’s publicly accessible? Yes, through checking their FINRA’s BrokerCheck you can view an advisor’s Central Registration Depository (CRD) number and their history of complaints or violations. Always conduct due diligence before investing your trust and money.
By dissecting incidents like these, I aim to empower each one of you with knowledge, helping you navigate the financial realm with eyes wide open. Always remember that the smallest detail can have the most significant impact on your financial health. Stay informed, stay cautious, and let’s keep those who handle our investments accountable.
