National Securities to Pay $9 Million for Allegedly Trying to Boost Market for Securities It Underwrote
Industry self-regulator Finra fined National Securities Corporation $9 million for several alleged regulatory violations, including that the broker-dealer attempted to artificially influence the market for public offerings it underwrote.
Finra accused the Boca Raton, Fla.-based firm of negligently omitting material information to investors, making inaccurate representations to Finra, and failing to supervise one of its registered representatives.
National Securities consented to Finra’s findings without admitting or denying them, according to the regulator’s June 23 order.
“Investors are entitled to rely on a market that is free from artificial price movement created by underwriters,” Jessica Hopper, head of Finra’s Department of Enforcement, said in a statement. “We will continue to vigilantly enforce rules designed to prevent underwriters from influencing the market for an offered security, including supporting the offering price by creating a perception of aftermarket demand.”
National Securities, which was acquired by financial services firm B. Riley Financial in 2021, has approximately 574 registered representatives and 119 branch offices, according to Finra’s order.
“National Securities Corp. is pleased to have resolved this legacy matter and remains fully committed to complying with its regulatory requirements as it focuses on supporting its clients,” a B. Riley spokeswoman said in a statement.
She added that National Securities has cooperated with Finra, since exited its investment banking business, and overhauled its compliance processes. The alleged regulatory violations occurred prior to B. Riley’s acquisition of the company.
“These sanctions do not involve any of B. Riley’s pre-existing banking, trading, research or brokerage businesses,” the spokeswoman said.
Finra said National Securities’ conduct was intended to artificially stimulate demand and support the price of certain offered securities, whose aftermarket performance was important to the firm’s ability to generate future investment banking revenue.
While acting as an underwriter for three initial public offerings and seven follow-on offerings, National Securities allegedly violated a regulation prohibiting underwriters, during a restricted period, from attempting to induce any person to bid for or purchase any offered security after trading begins, Finra said.
“Such solicitations can undermine the integrity of the market by artificially stimulating demand and supporting the pricing of the offering,” Finra’s order states.
The alleged misconduct took place between June 2016 and December 2018. The ten offerings collectively raised over $200 million for the issuers, who were mainly small-cap biopharma or technology companies, and generated net profits of approximately $4.77 million for NSC, according to Finra’s order.
Finra said that National Securities expressly conditioned allocations of the offerings on a branch manager’s or registered representative’s agreement to buy a specific number of shares in the aftermarket for the branch’s or representative’s customers. National Securities also allegedly threatened to reduce allocations to representatives who would not agree to solicit their customers to participate in the aftermarket, according to Finra. The firm’s own policies required shares to be allocated based on actual demand from customers, and they prohibited basing allocations on whether customers would buy additional shares in the aftermarket, according to the regulator.
Finra also said that National Securities negligently omitted to tell investors in two offerings related to asset management firm GPB Capital Holdings about delays in the issuer’s required public filings, including audited financial statements.
Last year, the SEC filed civil charges against GPB Capital, its former CEO, and others, accusing them of running a Ponzi-like scheme that raised over $1.7 billion. In a separate case, the Department of Justice charged GPB Capital and three individuals with investment fraud last year.
In sanctioning National Securities, Finra said that the firm also failed to supervise one of its registered representatives over a four-year period. National Securities allegedly did not respond to multiple red flags that the registered rep was falsifying information about customers’ assets and suitability information in order to circumvent company limits on concentration levels for non-traded real estate investment trust recommendations, according to Finra.
Write to Andrew Welsch at [email protected]
