An enduring theme on this blog over the last few years has been the SEC and FINRA’s crackdown on brokers accepting penny stocks for deposit. There are a number of different violations these firms have been cited for: violations of rule 15c2-11, failures to maintain adequate supervisory systems, failures to establish and implement appropriate anti-money laundering (AML) sytems and procedures, and allowing the sale of unregistered shares without a valid exception. On December 10, 2019 the FINRA National Adjudicatory Council (NAC) published its decision (pdf) in the matter of Spencer Edwards, a defunct brokerage. The decision cites Spencer Edwards for selling unregistered shares, failing to establish adequate supervisory procedures, and failing to implement an appropriate AML program. This decision follows from FINRA Enforcement’s complaint (pdf) filed on November 2, 2015 and the FINRA OHO extended hearing panel decision (pdf) on March 21, 2017. For some reason, the NAC decision is no longer listed in the case history and doesn’t show up in a FINRA FDA search for “Spencer Edwards.” The decision itself is still online at FINRA’s website, however.
See the NAC decision.
Spencer Edwards, Inc. (“Spencer Edwards” or the “Firm”) appeals an extended Hearing Panel decision issued on March 21, 2017. The Hearing Panel’s decision concerns Spencer Edwards’s liquidation of more than four billion unregistered shares of six microcap issuers on behalf of seven customer accounts during a two-year period.NAC Decision
The matters that are the subject of this appeal relate to the circumstances surrounding Spencer Edwards’s liquidation of the unregistered microcap shares, and, more generally, to the operations, policies, and procedures effecting the Firm’s microcap securities liquidation business. Specifically, on appeal, we examine whether: (1) Spencer Edwards’s liquidations of the unregistered microcap securities were subject to two registration exemptions under the Securities Act of 1933 (“Securities Act”); (2) Spencer Edwards established and maintained a supervisory system, including written supervisory procedures (“WSPs”), that was reasonably designed to prevent the sale of unregistered microcap securities; (3) Spencer Edwards established and maintained a supervisory system, including WSPs, related to the retention and review of its registered representatives’ emails; (4) Spencer Edwards adequately implemented its anti-money laundering policies and procedures to detect and cause the reporting of suspicious transactions related to its microcap securities liquidation business; and (5) Spencer Edwards preserved its registered representatives’ emails.
In the proceedings below, the Hearing Panel examined each of these issues and determined that Spencer Edwards engaged in the misconduct as alleged in each cause of action in the complaint. For sanctions, the Hearing Panel fined Spencer Edwards a total of $707,000, consisting of $600,000 in fines and $107,000 in disgorgement, and it suspended Spencer Edwards until the Firm retains an independent consultant who determines that the Firm has
implemented procedures adequate to reasonably ensure that the Firm is not improperly participating in unregistered securities sales. After an independent review of the record, we affirm, in relevant part, the Hearing Panel’s findings and modify the sanctions that the Hearing panel imposed.
The time period at issue was only one year: 2011. Spencer Edwards at the time specialized in the deposit and liquidation of microcap securities (penny stocks). From the decision:
During the relevant period, Spencer Edwards’s business focused on executing transactions in low-priced, thinly traded securities, and much of its revenues were derived from commissions on trades of microcap securities. In fact, during the relevant period, the Firm described itself as “one of the few remaining firms that actively trade low price securities and accept stock certificates.” Between January 2011 and December 2012, Spencer Edwards received more than $1.6 million in commissions on sales of roughly 16.5 billion shares of microcap securities.NAC Decision
There were six companies’ stocks that were covered in the decision: All-State Properties Holdings, Inc (ATPT), Eastern Asteria, Inc (EATR), Encounter Technologies Inc (ENTI), Healthnostics, Inc (HNSS), Greene Concepts, Inc (LKEN), and Strategic Management & Opportunity Corp (SMPP). The companies themselves were not accused of wrongdoing.
One of the parties that deposited stock at issue in the NAC decision is Belmont Partners, LLC, controlled by “JM”. I believe that “JM” is Joseph Meuse and Belmont Partners, LLC is the same company that the SEC sued along with Meuse in December 2011. Belmont Partners, LLC and Meuse settled with the SEC in 2014. JM and Belmont were not accused of wrongdoing in the FINRA complaint or decision. The stock at issue in that case was not one of the ones traded at Spencer Edwards.
The final decision:
We affirm the Hearing Panel’s findings that Spencer Edwards: (1) sold unregistered and nonexempt microcap securities, in violation of FINRA Rule 2010 (cause one); (2) failed to supervise its microcap securities liquidation business and the retention and review of its registered representatives’ emails, in violation of NASD Rule 3010 and FINRA Rule 2010 (cause two); (3) failed to implement the anti-money laundering procedures related to its microcap securities business, in violation of FINRA Rules 3310 and 2010 (cause three); and (4) failed to retain its registered representatives’ emails, in violation of Section 17(a)(1) of the Exchange Act, Exchange Act Rule 17a-4, FINRA Rules 4511 and 2010 (on or after December 5, 2011), and NASD Rule 3110 and FINRA Rule 2010 (on or before December 4, 2011) (cause four).
For sanctions, we fine Spencer Edwards a total of $3,490,940 as follows: (1) $1.7 million for the unregistered securities sales (cause one); (2) $1.7 million for the supervisory and antimoney laundering violations (causes two and three); and (3) $90,940, plus prejudgment interest,76as disgorgement for the unregistered securities sales. We also assess, but do not impose, a suspension on Spencer Edwards until the Firm engages an independent consultant who will monitor the Firm’s acceptance and liquidation of microcap securities deposits and review the Firm’s supervisory and anti-money laundering procedures related to its microcap securities liquidation business. Finally, we affirm the Hearing Panel’s order that Spencer Edwards pays hearing costs of $16,813.43, and we assess appeal costs of $1,669.74.NAC Decision, pages 39-40
The fine imposed by the NAC is almost five times larger than the $707,000.00 fine imposed by the Hearing Panel that the firm had appealed! The NAC explains the large fine as being warranted because of Spencer Edwards’ history of violations, including a June 2019 AWC (pdf) in which the firm admitted having an inadequate AML program from 2013 to 2015. While this decision may appear meaningless (I don’t even think a defunct firm has to pay a FINRA fine), this should serve as a warning to the few remaining brokers specializing in the deposit and liquidation of microcap securities.
It is possible that Spencer Edwards could appeal the decision to the SEC and from there to US Appeals Court. If they appeal I will update this post.
2019-12-13 — added two sentences to first paragraph: “The decision cites Spencer Edwards for selling unregistered shares, failing to establish adequate supervisory procedures, and failing to implement an appropriate AML program” and “The decision itself is still online at FINRA’s website, however. “
2019-12-16 — changed title