J.H. Darbie & Co, Inc. (“Darbie”), a FINRA member since 1998 headquartered in New York City, offers securities business via 59 registered reps between its NY and NJ locations. Wolf A. Popper, Inc. (“Popper”), a FINRA member since 1998 located in NY, is an affiliate of Darbie which share Darbie’s ownership and control. On August 6, 2015, Darbie and Popper were censured and fined $10,000 by FINRA’s Department of Enforcement after consenting to FINRA’s findings that Darbie sold unregistered securities to certain customers, failed to provide adequate supervision to comply with Section 5, and failed to adequately address AML procedures. FINRA Letter of Acceptance, Waiver, and Consent No. 2014041086502 (Aug. 6, 2015).
According to the Acceptance, Waiver and Consent
From August-December of 2010, a Darbie registered rep, RM, executed the sale of 2.2 billion shares of 2 microcap issuers, Vega Biofuels, Inc. (“VGPR”) and Triton Distribution Systems, Inc. (“TTDZ”). The AWC indicates that such issuers reported no revenues and were thinly traded. The AWC further states that there was no registration statement that had been filed with the SEC or which had been in effect regarding the sales (such transactions were not considered exempt from the SEC).
The AWC further states that between March of 2008 and March of 2014, Darbie had failed to conduct an adequate inquiry into such transactions notwithstanding red flags which indicated that that related customers were engaging in unregistered securities transactions. The AWC noted that had Darbie considered certain accounts, referred to as Q Group Accounts, as related (particularly considering RM’s rotating trading of TTDZ among the Q Group Accounts), and aggregated known holdings of the customers in TTDZ and VGPR, Darbie would have clearly been aware that the accounts controlled or owned in excess of 10% of outstanding shares of the issuers and could not have therefore engaged in the sale of greater than 1% of the outstanding shares of the same class of stock of such issuers during any 3 month pd.
Section 5 prohibits the offer or sale of securities, through interstate commerce of the mails, unless a registration statement is in effect as to the securities (or offer or sale is exempt from registration). The AWC indicates that by Darbie facilitating the sale of these unregistered securities (not subject to exemption from registration statements), Darbie violated Section 5 and FINRA Rule 2010.
According to the AWC, Popper, from June 2009 through October of 2010, had also facilitated the deposit and liquidation of several billion shares of low priced microcap stocks for their customers even though Popper did not have adequate procedures in place to do so. Popper, according to the AWC, violated FINRA Rules 3310(a) and 2010, and NASD Rules 2110 and 3011(a) and (c) .
The AWC additionally indicated that Darbie, during the relevant period, had failed to establish and enforce an adequate supervisory system to comply with Section 5. FINRA claimed that Darbie’s failures included failing to implement reasonable due diligence regarding stocks deposited in certificate form, had accepted a transfer agent’s assertions with regard to tradability of shares without appropriately taking steps to ensure such information was verified. Finally, the AWC indicates that Darbie failed to have in place a system to ensure review and the aggregation of certain securities held by related clients in order to determine whether such customers had a control relationship with issuers and would in turn be subject to volume limitations on re-sales. FINRA determined that such conduct was in violation of FINRA Rule 2010 and NASD Rules 2110 and 3010(a) and (b).
Securities Brokerage Firms Duty to Supervise
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 registered representative 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.
A private right of action exists under exchange rules if claim is for misrepresentation or deception. However many courts, including the United States Supreme Court, have recognized a private cause of action for violation of NASD and NYSE Rules. Specifically, with respect to the failure to supervise claims, courts will impose civil liability, unless the broker-dealer can establish a “good faith” defense that it maintained, and enforced an adequate system of supervision. It is the brokerage firm’s burden to prove the adequacy and proper implementation of their supervision and compliance system. Unlike a brokerage firm’s secondary liability for the acts of their registered representatives as their agent or employee, the failure to supervise or comply with self regulatory rules may be basis for primary liability.
Guiliano Law Group
If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.
