On March 5th, 2019 FINRA accepted an offer of settlement from TriPoint Global Equities LLC, Michael Boswell (TriPoint’s President and Chief Compliance Officer), and Andrew Kramer (TriPoint’s Head Trader). The summary from the settlement order is as follows:
1. During the period November 2011 through December 2015 (the “Relevant Period”), TriPoint Global Equities, LLC (“TriPoint” or the “Firm”) engaged in the penny stock business, effecting transactions for customers whose primary trading activity involved the deposit and prompt liquidation of low-priced securities (also known as “penny stocks” or “microcap stocks”). Nonetheless, throughout the Relevant Period, TriPoint, through AntiMoney Laundering (“AML”) Compliance Officer (“AMLCO”) and Chief Compliance Officer (“CCO”) Michael Boswell (“Boswell”), and Head of Trading (“Head Trader”) Andrew Kramer (“Kramer”), failed to establish and implement AML policies and procedures reasonably 3 designed to detect and report suspicious activity, including AML red flags, in connection with the Firm’s penny stock business.
2. Further, during the Relevant Period, Respondents TriPoint, Boswell, and Kramer failed to reasonably identify and address red flags of potentially suspicious activities presented by Customer EM’s deposits and liquidations of penny stocks. By virtue of this conduct, Respondents TriPoint, Boswell and Kramer violated FINRA Rules 3310(a) and 2010.
3. In addition, during the Relevant Period, TriPoint failed to comply with the registration requirements of Section 5 of the Securities Act of 1933 (the “Securities Act”) by engaging in the unlawful re-sales of approximately 16,907,900 shares of restricted securities of two penny stock issuers into the public market on behalf of Customer EM, in violation of FINRA Rule 2010.
4. Further, TriPoint failed to establish and maintain a supervisory system, including written supervisory procedures (“WSPs”), reasonably designed to achieve compliance with the registration requirements of Section 5 of the Securities Act of 1933 (the “Securities Act”) for the re-sales of restricted securities, in violation of NASD Rule 3010(a) and FINRA Rule 2010 for conduct prior to December 1, 2014 and in violation of FINRA Rule 3110(a) and FINRA Rule 2010 for conduct on or after December 1, 2014.
Essentially all the firm’s failures identified in the settlement relate to trading by one customer, “EM”, who deposited and sold shares acquired through “‘toxic’ or ‘death spiral'” convertible notes. From the settlement:
C. Red Flags Involving Customer EM’s Deposits and Liquidation of Low-Priced Securities
32. In or about March 2015, Customer EM opened an account with TriPoint. 33. At all times, TriPoint, Boswell, and Kramer were aware that Customer EM’s business was the liquidation of low-priced securities obtained through convertible note investments. By contrast to a traditional convertible debt arrangement, in which the conversion formula is fixed, the conversion ratio for Customer EM’s transactions was based on fluctuating market prices to determine the number of shares of common stock to be issued. This market price-based conversion formula protected Customer EM against price declines. However, a market pricebased conversion formula can lead to dramatic stock price reductions and corresponding negative effects on both the issuer and its shareholders. Accordingly, as the SEC has explained, these types of convertible debt financing arrangements have colloquially been referred to as “toxic” or “death spiral” convertibles.
34. Eight of the issuers whose stock was deposited and liquidated by Customer EM through TriPoint presented red flags signaling potentially suspicious activity for penny stock companies. These red flags included several that the Firm’s AML Plan (and FIN RA’s Small 11 Firm Template) identified, such as limited or no revenues, large net losses and accumulated deficits, and material changes in business lines, names, and structures. In addition, although each of the issuers was an SEC reporting company, several failed to make the appropriate SEC disclosures or were delinquent in their regulatory filings. As discussed further herein, one company’s CEO had been the subject of a California State Court Desist and Refrain order relating to re-sales of another penny stock issuer of which he was an owner. Several of the issuers also released numerous press releases around the time of Customer EM’s deposits and liquidations. Publicly available information, including the issuers’ own SEC filings and a website that published newsletters and maintained message boards focused on microcap stocks, pointed to risks surrounding several of the issuers’ securities. Customer EM’s liquidations of the penny stocks amounted to a significant percentage of the TMV of these securities. At times, Customer EM’s liquidations represented over 90° o of the TMV. This information was readily available in public filings made by the issuers to the SEC and on the interne.
Per the company’s Brokercheck report, it currently clears through FolioFN Investments Inc. The settlement does not mention TriPoint having changed clearing firms so I think it likely that it cleared through FolioFN Investments at the time of the events covered by the settlement (November 2011 through December 2015, the “Relevant Period”).
The settlement calls for a 30-day suspension and $10,000 fine for Boswell and a 30-day suspension and $10,000 fine for Kramer. TriPoint Global Securities agreed to a censure, a fine of $100,000, the disgorgement of $34,001 in commissions, and a 12-month ban from receiving penny stocks for deposit except if the stock comes from an offering “in which TriPoint acted as a selling agent.”
Other recent FINRA actions against brokers involved in the penny stock business include the FINRA complaint against Lek Securities in November 2018 and the FINRA fine of ICBCFS (Industrial and Commercial Bank of China Financial Services LLC) in July 2018. Recent SEC actions against brokers involved in penny stocks include settlements with ICBCFS and Chardan Capital Markets in July 2018, the SEC settlement with COR Clearing in September 2018 that forced it to stop accepting penny stock deposits, and the February 2019 lawsuit against Spartan Securities Group.