Oppenheimer & Co has agreed to settle with the SEC and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) for a combined $20 million in sanctions stemming from allegations the firm improperly sold penny stocks and ignored red flags. As part of the settlement, Oppenheimer will admit wrongdoing and hire an independent consultant to review its policies over the next five years.
The SEC said Oppenheimer sold billions of shares of penny stocks in unregistered offerings on behalf of customers, sometimes aiding in customers’ illegal activity. Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, stated “despite red flags suggesting that Oppenheimer’s customer’s stock sales were not exempt from registration, Oppenheimer nonetheless allowed unregistered sales to occur through its account, failing in its gatekeeper role.” The actions against Oppenheimer demonstrate the SEC’s ongoing focus on compliance issues.
This settlement is a stark reminder that while penny stocks may be cheap, they are often risky due to low liquidity and poor reporting standards. Low liquidity means it may be hard to find a buyer for a particular stock, and stock prices may be easier to manipulate. There are, of course, many legitimate penny stock companies, but the Oppenheimer settlement serves as a warning to investors to proceed with caution – penny stocks can be high-risk investments and are not suitable for everyone.
Shustak Reynolds & Partners, P.C.’s New York, San Francisco, Irvine and San Diego securities, FINRA and SEC attorneys handle a wide range of securities and FINRA related issues and have substantial expertise and experience in the securities and brokerage business. Contact us today for a confidential analysis of your situation.
The Financial Industry Regulatory Authority (FINRA) recently issued new guidance cautioning member firms about the use of broad confidentiality provisions in settlement agreements and discovery stipulations. According to FINRA, confidentiality provisions that may prevent or dissuade parties from reporting potential securities law violations to regulators may violate FINRA rules.
FINRA Rule 2010 provides that “[a] member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.” The language is all-encompassing and may leave a firm contemplating whether its conduct complies in a number of circumstances, including confidential settlements of customer complaints and arbitrations. The standards for confidentiality provisions are now clearer following the issuance of FINRA Notice to Members 14-40. In no uncertain terms, a settlement provision may not restrict communication with FINRA, the SEC or any federal or state regulatory authority regarding securities violations, nor may it restrict any response to an inquiry or investigation by regulators. This rule extends to the discovery process in arbitration as well; any stipulation between the parties may not restrict or prohibit disclosure of documents or information to regulators.
Not only does FINRA require firms to refrain from imposing overly restrictive provisions, but firms also must explicitly notify signatories that confidentiality provisions do not limit communication with regulators. FINRA offers the following example of such a disclosure:
Any non-disclosure provision in this agreement does not prohibit or restrict you (or your attorney) from initiating communications directly with, or responding to any inquiry from, or providing testimony before, the SEC, FINRA, any other self-regulatory organization or any state or federal regulatory authority, regarding this settlement or its underlying facts or circumstances.
What is the take-away? Notwithstanding a confidentiality provision in a settlement agreement or discovery stipulation, a potential whistleblower generally may alert regulators to potentially fraudulent or suspicious activities at any time. Firms must review their current confidentiality provisions and revise any language which does not conform to guidelines to avoid a violation of Rule 2010 and potential discipline.
Shustak Reynolds & Partners, P.C.’s New York, San Francisco, Irvine and San Diego securities, FINRA and SEC attorneys have extensive experience in representing broker-dealers, registered representatives, investment advisors and individuals in a variety of securities-industry matters, including FINRA arbitrations and SEC and FINRA regulatory investigations and proceedings. Contact us today for a confidential analysis of your situation.
