A wealth manager under different ownership after firing hundreds of financial advisors as part of a compliance overhaul has settled a FINRA case alleging it misled investors.
National Securities generated hundreds of thousands of dollars in commissions by selling private placements managed by its subsidiary RIA, National Asset Management, in December 2017 and January 2018 at more than double the listed price of premarket shares of ” Company A”. comparing the company as of April 6 to FINRA. The Boca Raton, Fla.-based company agreed to pay a $363,447 disgorgement plus interest and a $300,000 fine.
After B. Riley Financial acquired a 56% interest in National Holdings, National’s parent company, for $22.9 million in 2018, B. Riley Financial acquired the remaining equity for $17.4 million last year . National fired up to 300 advisors in 2017 and 2018 to adopt a new culture and shed registered agents who had too many regulatory disclosures, the then-CEO said. The acquisition helped boost wealth management profits at B. Riley, which also bought Wunderlich Securities for $67 million in 2017, by more than 400% over the past year.
When firms like National sell pre-IPO products managed by an RIA affiliate, “the incentive is to get the shares out the door,” said Michael Edmiston, attorney at Jonathan W. Evans & Associates and current president the Public Bar Association for Investors. He noted FINRA’s allegations that National had not conducted due diligence on an offering and had no supervisor for the managing director responsible for pre-IPO stock sales. The disgorgement and fine exceed National’s proceeds from the sales, FINRA’s order said.
“These combined penalties are excellent because they make the economics of not complying with FINRA rules and regulations and federal securities laws too expensive,” Edmiston said. “It’s good news for the rest of the industry that this type of investor abuse will not be tolerated.”
Representatives for B. Riley and National of Los Angeles did not respond to requests for comment. As part of the settlement, National has neither admitted nor denied FINRA’s allegations.
The merger of National Holdings under B. Riley Wealth Management contributed significantly to the acquiring firm’s bottom line, but also to its compliance concerns. Last year, the money manager’s total revenue rose 423% to $382 million, while its income soared 448% to $15.9 million, according to the Nasdaq-listed company’s latest earnings release. According to the company, the enormous growth is “mainly” due to the takeover. National has 630 agents and 130 branches, and the entire assets unit manages $32 billion in assets.
On the other hand, National also has a remarkable disciplinary history. In its most recent case a year ago, National agreed to pay a $3 million fine and take remedial action after the New York State Department of Financial Services claimed it didn’t have multifactor authentication in its systems by August 2020 systems used, according to the detailed information provided by the company FINRA BrokerCheck file. In 2018, National refuted a Reuters investigation into his conflicts of interest with a former controlling biotechnology shareholder named Fortress Biotech.
FINRA’s settlement did not identify “Company A,” which pre-IPO issued shares managed by National’s RIA and sold by its brokers. According to the settlement, the company was “the subject of extensive speculation in the financial press” at the end of 2017 about a possible IPO. In addition, a section of the relevant disciplinary history document listed a May 2011 case in which National settled the regulator’s allegations that it failed to conduct the required due diligence and had no reasonable basis for recommending two previous private offers.
For the private placements issued by Company A, National sold $10 million of common stock at a quoted price of $9.75 per unit in an offering, according to FINRA. It then sold a second round of pre-IPO shares that eventually attracted $3.45 million in investments from 38 clients and netted “placement fees” of $405,500, the settlement order said. Investigators say the cost was twice the advertised maximum price. Additionally, according to FINRA, an executive with the initials “EK” ran the shares with no formal supervisors in the company prior to the IPO.
“In connection with the second offer [National] misleads its customers to believe that the offering has acquired or may acquire shares in Company A at a maximum price of $9.75,” the complaint reads. “[National]however, had not conducted due diligence to determine if shares were available at that price from any seller.”
Expensive and risky alternative investments hold the potential for outsized gains and losses and remain a constant focus for regulators and plaintiff attorneys representing aggrieved clients. Both FINRA and state regulators, which are part of the North American State Securities Administrators Association, have continuing education requirements “to ensure advisors are aware of the inherent risks and specific product details of alternative investments,” according to Todd Rosenfeld, chief learning officer at the Securities Training Corporation.
“As part of best practices, training should also include appropriate disclosures, particularly for alternative investments,” Rosenfeld said in an email. “I say ‘particularly’ because alternative investments generally carry more risk than traditional stocks and bonds.”
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