Oppenheimer Settles with SEC, FinCEN

Oppenheimer & Co., Inc. settled an action with the SEC centered on violations of the broker registration provisions, a failure to file suspicious activity reports or SARS and the sale of unregistered penny stock shares. The settlement is based in part on admissions that the firm violated the Federal securities laws and to certain facts which are detailed in the Order as the predicated for the violations. Oppenheimer also settled related charges with the Financial Crimes Enforcement Network or FinCEN. In the Matter of Oppenheimer & Co., Inc., Adm. Proc. File No. 3-16361 (Jan. 27, 2015).

The proceeding has two key parts. The first focuses on the period July 2008 through May 2009. During that period the firm executed the sale of millions of shares of penny stocks for Gibraltar Global Securities, Inc., a broker-dealer registered in the Bahamas but not the United States. Despite the fact that the Gibraltar account was in the name of the firm, the Order states that Oppenheimer knew the broker was actually executing transactions and providing brokerage services for its customers.

Gibraltar was exempt from U.S. taxes. Many of its customers were U.S. citizens who were not. Gibraltar executed certain forms that were provided to Oppenheimer to exempt its transactions from U.S. withholding taxes. The beneficiaries of this filing were the customers of the Bahamas based broker, a fact known or which should have been known to Oppenheimer. Since Oppenheimer failed to withhold and remit the required tax it became liable for the payments. As a result its books and records, which did not reflect this liability, were inaccurate.

The firm also failed to file SARS. As a result of the rapid deposit and withdraw of, respectively, large amounts of penny stocks and cash, the firm was aware of suspicious activity. That triggered an obligation to file a SAR. Oppenheimer failed to make the requisite filings. As a result of these activities Oppenheimer violated Exchange Act Sections 15(a) and 17(a) and the related rules.

The second part of the action focuses on the period October 2009 through December of the next year. During that period a client of the firm deposited large amounts of penny stocks in its account for six companies. In total over 2.5 billion shares were deposited in the account. The transactions yielded $12 million in proceeds and just under $600,000 in commissions.

There were no registration statements on file for the shares of the six companies. Likewise, no exemption was available permitting the sale into the public markets. During these transactions Oppenheimer became aware of a series of red flags which had been cited in earlier Commission and FINRA guidance. Those included: the number of shares deposited; the fact that the shares were for penny stocks that were typically certificated; that the shares were obtained in many instances pursuant to conversion provisions often shortly before their issuance; the pattern of depositing and liquidating the shares and then withdrawing the proceeds; and the fact that transactions took place over a relatively short period of time involving a large percentage of the outstanding shares for the issuer.

Oppenheimer did not conduct a reasonable inquiry to claim a Section 4(a)(4) exemption. The firm also did not ascertain that another exemption was available. Finally, Oppenheimer did not establish and implement policies and procedures to prevent and detect the Section 5 violations.

As part of the resolution of the case the firm agreed to implement a series of undertakings including the retention of an independent compliance consultant who will prepare a report with recommendations which will be adopted. The firm also consented to the entry of a censure and a cease and desist order based on the Sections cited in the Order. Oppenheimer will pay disgorgement of $4,168,400, prejudgment interest and a civil penalty in the amount of $5,078,129 which, together with the disgorgement and prejudgment interest, totals $10 million, the same amount paid to resolve proceedings with FinCen.

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