Noble Financial Capital Markets, located in Boca Raton, Florida, and firm’s president, Nicolaas Petrus Pronk, have been censured and fined by Financial Industry Regulatory Authority (FINRA) according to an Office of Hearing Officers Order Accepting Offer of Settlement containing findings that Noble Financial Captial Markets and Pronk made omissions regarding securities recommended to customers. Department of Enforcement v. Noble Financial Capital Markets et al., No. 2013035740901 (Oct. 18, 2017). Pronk was suspended for eight months by FINRA, and was assessed a fine of $25,000.00; the firm was fined $225,000.00.
According to the Order, seven customers of Noble bought approximately one million shares of AdCare Health Systems, Inc. after having received investment recommendations from the firm and Pronk, where the customers were not made aware of several conflicts of interests associated with the transactions prior to investing.
Apparently, AdCare Health Systems was promoted by Noble and Pronk to the firm’s prospective customers, where customers were kept in the dark about how the firm and Pronk would benefit from investment banking relationship that Noble maintained with AdCare Health Systems, and had been deprived of information with respect to the firm’s acts of arbitrage concerning the securities that AdCare issued. The Order stated that financial incentives which Pronk and the firm enjoyed in that regard were never made known to customers.
Apparently, Pronk controlled sales and promotions of AdCare Health Systems among all other investment banking, sales, and proprietary trading that occurred through the firm. The AdCare shares were reportedly solicited aggressively by Noble and Pronk by way of its institutional sales department brokers and through road shows conducted by the institutional sales and investment banking departments. Further, the Order stated that research reports were pushed by the firm’s research department regarding AdCare Health Systems, and misleading sales scripts were used by the firm’s brokers in the course of soliciting funds from investors.
The Order revealed that seven of the customers that bought AdCare Health Systems, Inc. common stock were deprived of information about conflicts of interests. Specifically, the customers were not told about the speculative arbitrage trading strategy involving the common stock as well as AdCare warrants that were publicly traded; that brokers were promised abnormally large commissions to promote AdCare Health Systems common stock; that the firm was due to receive a seven percent cash payment from AdCare based on the gross proceeds raised through the exercising of privately held and publicly held AdCare warrants; and that $6,000.00 a month was paid by AdCare to Noble for advising AdCare.
The Order revealed that Noble and Pronk either knew or were reckless in not knowing that the aforementioned omissions had been made regarding AdCare to investors. Specifically, the Order detailed four conflicts of interest which FINRA claimed were material: 1) FINRA claimed that Noble and Pronk effected a strategy consisting of risky arbitrage based trading in AdCare as well as with warrants of AdCare that had been publicly traded; 2) brokers were reportedly promised substantial compensation incentives, which exceeded the normal commissions paid to such brokers, in return for broker’s promoting and generating AdCare sales from prospective investors; 3) Noble was due to receive a cash fee equating to seven percent of the AdCare warrants which were privately held and publicly traded, per a warrant agreement; and 4) Noble received six thousand dollars per month by AdCare in return for providing advisory services to AdCare.
The Order revealed that the firm used its proprietary account to buy and hold the AdCare warrants while effecting short-sales to its customer base. Then, the firm exercised the warrants that were held long-term, and utilized the AdCare common stock shares it obtained by way of exercising the warrants to cover short positions in the AdCare common stock. Evidently, the firm and Pronk were able to profit from the arbitrage strategy through the spread between the price to buy the warrants and the price in which they were exercised, as well as through its short-sales of AdCare Health Systems common stock.
FINRA found that Pronk’s omissions in that regard constituted violations of FINRA Rules 2010, and that the firm violated FINRA Rules 2010 by way of committing a violation of Securities Act of 1933 Section 17(a)(2). FINRA also found that Noble’s conduct was violative of FINRA Rule 2010 and 2711(h) based on the omissions in research reports relating to the relationship and compensation arrangements that the firm had with AdCare.
FINRA Public Disclosure reveals that from May 30, 1995, to November 7, 2003, Pronk was identified in ten customer initiated investment related disputes, where customers agreed to settle their claims for a total of $510,621.10 in damages based upon allegations of suitability. Noble Capital Markets, Inc. has been subject of six additional regulatory infractions concerning the firm’s misconduct, as well as twelve customer initiated investment related arbitration claims. Pronk has been registered with Noble Captial Markets, Inc. since February 1, 1988.
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