National Securities settles FINRA pre-IPO case for $663,000

A wealth manager under different ownership after firing hundreds of financial advisers as part of a compliance review has settled a FINRA case alleging he misled investors.

National Securities generated hundreds of thousands of dollars in commissions selling private placements managed by its RIA affiliate, National Asset Management, in December 2017 and January 2018 at more than double the quoted price of pre-IPO shares in the “Company HAS”. according to the company’s April 6 settlement with FINRA. The Boca Raton, Fla.-based company agreed to pay restitution of $363,447 plus interest and a $300,000 fine.

After acquiring a 56% stake in National’s parent company, National Holdings, for $22.9 million in 2018, B. Riley Financial bought the remaining equity last year for $17.4 million. National laid off up to 300 advisers in 2017 and 2018 infuse a new culture and ditch registered representatives who had too many regulatory disclosures, its CEO said at the time. The acquisition helped increase wealth management profits of more than 400% last year at B. Riley, which also bought Wunderlich Securities for $67 million in 2017.

When companies like National sell pre-IPO products run by an RIA affiliate, “the incentive is to get the stock out,” said Michael Edmiston, an attorney at Jonathan W. Evans & Associates, who is the current chairman. of the Public Bar Association of Investors Advocates. He noted FINRA’s allegations that National did not perform due diligence for an offering and did not have a supervisor for the managing director in charge of pre-IPO stock sales. The disgorgement and fine exceed what National made from the sales, the FINRA order says.

“These combined penalties are great because they make it too costly to violate FINRA rules and regulations and federal securities laws,” Edmiston said. “It’s a good message to the rest of the industry that this kind of investor abuse will not be tolerated.”

Los Angeles-based representatives for B. Riley and National did not respond to requests for comment. As part of the settlement, National has neither admitted nor denied FINRA’s allegations.

The combination of National Holdings under B. Riley Wealth Management significantly improved the acquirer’s bottom line, but also its compliance concerns. Last year, the wealth manager segment’s total revenue soared 423% to $382 million, while its revenue jumped 448% to $15.9 million. according to to the latest income statement of the company listed on Nasdaq. The huge growth comes “primarily” from the acquisition, according to the firm. National has 630 representatives and 130 branches, and the global wealth management unit has $32 billion in assets under management.

On the other hand, National also boasts a considerable disciplinary history. In its latest case a year ago, National agreed to pay a $3 million fine and take corrective action after the New York State Department of Financial Services alleged it had failed. not used multi-factor authentication in its systems before August 2020, according to to the company’s detailed FINRA BrokerCheck file. In 2018, National refuted a Reuters investigation about his conflicts of interest related to a former majority shareholder in the biotechnology industry called Fortress Biotech.

FINRA’s settlement did not identify “Company A,” which issued pre-IPO shares managed by National’s RIA and sold by its brokers. The company had been “the subject of much speculation in the financial press” about a potential IPO in late 2017, according to the settlement. Additionally, a section of the relevant disciplinary history document lists a May 2011 case in which National settled regulator allegations that it failed to perform due diligence and has a reasonable basis to recommend two prior private offerings. .

For the private placements issued by Company A, National sold $10 million worth of stock at a listed price of $9.75 per unit in a single offering, according to FINRA. Then he sold a second round of pre-IPO shares that ultimately attracted $3.45 million in investments from 38 clients and net “placement expenses” of $405,500, the settlement order says. The cost came in at double the maximum quoted price, according to investigators. Additionally, an executive with the initials “EK” led the pre-IPO actions without any formal supervisor within the firm, according to FINRA.

“As part of the second offer, [National] misled its clients into believing that the offer had acquired, or would be able to acquire, shares of Company A, at a maximum price of $9.75,” the complaint states. “[National]however, had not done any due diligence to determine whether shares were available at that price from a seller.

Expensive and risky alternative investments carry the potential for huge gains and losses, and they remain a area of ​​constant interest for regulators and plaintiffs’ attorneys representing injured clients. Both FINRA and state regulators who are part of the North American State Securities Administrators Association have continuing education requirements “to ensure advisers are aware of the inherent risks and specific details of alternative investment products,” according to Todd Rosenfeld, director of the apprenticeship at the Securities Training Corporation.

“As part of best practice, training should also include appropriate information, especially for alternative investments,” Rosenfeld said in an email. “I say ‘mostly’ because alternative investments generally carry more risk than traditional stocks and bonds. »