Cantor Fitzgerald & Co., headquartered in New York, New York, was censured, fined $6,000,000 and disgorged of $1,285,561 plus interest after consenting to findings that the firm had failed to adequately supervise sales of microcap securities pertaining to due diligence and identifying red flags with unlawful distributions of unregistered securities. The firm’s executive managing director of equity capital markets, Jarred Kessler, was fined $35,000 and suspended in all principal capacities for a period of three months; while the firm’s equity trader Joseph Ludovico was fined $25,000 and suspended in all capacities for a period of two months. Letter of Acceptance, Waiver and Consent, No. 2012034964301 (Dec. 21, 2015).
According to the AWC, from March 2011 through September 2012, the firm had failed to adequately supervise the sales of microcap securities and sold more than 73.6 billion shares of microcap securities without conducting adequate due diligence. The transactions were reportedly effected by Ludovico without reasonable inquiry into the facts surrounding the transactions. The firm and Ludovico had apparently failed to identify red flags concerning suspicious activity indicating that some of the sales might actually constitute illegal, unregistered distributions. The AWC stated that a portion of the 73.6 billion shares that were sold were not actually registered with the Securities and Exchange Commission, nor were the sales exempt from registration.
The AWC stated that during the relevant period, the firm’s supervisory system for microcap securities trading was not reasonably designed for achieving compliance with Section 5 of the Securities Act. The AWC noted that the firm’s supervisory system failed to contain adequate procedures requiring the firm to determine whether the shares being sold were restricted or control securities; failed to provide adequate guidance on how to determine whether the sales of restricted and control securities were exempt from registration requirements; or failed to provide any adequate means for supervisors to identify red flags that might indicate unlawful distributions of unregistered securities.
Kessler, who was executive managing director of equity capital markets, ultimately supervised the sale of the microcap securities, and expanded the microcap securities business notwithstanding indications that the supervisory system was not adequately designed to meet the needs of the business.
The AWC further reported that the firm had failed to establish and implement anti-money laundering programs that would detect and cause reporting of potentially suspicious activity pertaining to the microcap securities business. The firm’s policies were reportedly not adequately tailored to identify potentially suspicious microcap securities transactions, and the firm failed to adequately train staff on risks of the securities along with red flags associated with such.
FINRA found that as a result of the aforementioned conduct, the firm and Ludovico had contravened Section 5 of the Securities Act of 1933 in violation of Rule 2010; the firm and Kessler violated NASD Rule 3010 and Rule 2010; and the firm had violated Rules 3310(a), 3310(e), and 2010.
Firms and individuals, not surprisingly, are prohibited from unauthorized use of customer funds, borrowing of a customer’s securities or funds, forgery, non-disclosures or misstatements of material facts, and various deceptions and manipulations. Such conduct can also be found to violate criminal and other civil laws, and be subject to sanction from the federal and state government bodies.
Securities brokerage firms have a duty to supervise their brokers and the sales practices of their brokers, and to review customer statements for, among other things, evidence of suitability, unauthorized trading, or excessive activity. FINRA Conduct Rule 3010 specifically provides that each member shall establish and maintain a system to supervise the activities of each Stockbroker and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules of this Association. Final responsibility for proper supervision shall rest with the member.
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