ACAP Financial Inc., a broker-dealer headquartered in Salt Lake City, Utah, has been expelled from Financial Industry Regulatory Authority (FINRA) membership per an Office of Hearing Officers’ Order Accepting Offer of Settlement containing findings that ACAP Financial, inter alia, facilitated unregistered securities sales. Department of Enforcement v. ACAP Financial, et al., No. 2012030459101 (Dec. 6, 2016).
According to the Order, from January of 2011 to December of 2013, the firm, via chief compliance officer and president, Kirk Lynn Ferguson, as well as compliance officer, Gary Hume, took part in the liquidation of more than 3,300,000,000 shares of four microcap stocks – all which were unregistered.
The Order stated that the microcap stocks in question were deposited into accounts of two customers of ACAP. Specifically, an individual VB, had opened up such accounts for two corporations and was listed as the account’s authorized contact person. The Order revealed that JMB, who was VB’s husband, had been allowed by ACAP Financial to control such accounts, and even instruct the firm to liquidate positions in the unregistered securities.
FINRA found that ACAP failed to properly investigate JMB. As a result, the firm reportedly failed to detect that JMB had been subject to substantial discipline regarding securities infractions, and was actually barred by Securities and Exchange Commission (SEC) as well as National Association of Securities Dealers (NASD) from taking any part in the offerings of penny stocks.
The Order further indicated that debt investments or penny stocks were first possessed by the accounts and ultimately transformed into penny stock shares. Subsequently, JMB or VB had effected the liquidations of such penny stock shares soon after deposits had been made. Finally, the proceeds had been transferred out of the accounts promptly after the liquidations.
Critically, the Order stated that the shares had not been exempted from registration with the SEC, nor registered. The Order noted that ACAP received commissions totaling nearly $144,010.00 in connection with the illegal sales. FINRA found that the firm’s conduct in this regard constituted unregistered securities sales in violation of Securities Act of 1933 Section 5. As such, FINRA found that the firm violated FINRA Rule 2010.
The firm was also cited for failing to properly supervise sales of securities to ensure compliance with Securities Act of 1933 Section 5. Particularly, the firm did not create and enforce supervisory procedures and systems that were adequately designed to guide staff on when and how an independent inquiry was to be conducted concerning SEC registration requirements. FINRA found that the firm’s supervisory failure in this regard was violative of FINRA Rule 2010 as well as NASD Rule 3010.
The Order further revealed that Hume was inadequately supervised by Ferguson. Particularly, Ferguson reportedly failed to make sure that Hume reasonably inquired and conducted due diligence on an independent basis concerning VB’s and JMB’s liquidations of penny stocks. The Order indicated that documents that customer provided the firm had not been reasonably analyzed by Ferguson in order to determine whether such sales of penny stocks constituted unlawful unregistered stock distributions. FINRA found that the firm’s conduct was violative of FINRA Rule 2010, as well as NASD Rule 3010 in this regard.
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