SEC, USAO, FINRA Bring Charges For Sale of Unregistered Penny Stocks
The sale of unregistered penny stock shares spawned three recent securities enforcement actions. First, the SEC and the U.S. Attorney’s Office for the Southern District of California filed actions centered on an off-shore boiler room coordinated from Florida. The SEC’s action named John Rizzo, CEO of iTrackr Systems, Inc., with running a boiler room that raised about $2.5 million from the sale of unregistered shares in the company in 2009. SEC v. Rizzo, Civil Action No. 13CV1801 (S.D. Cal. Filed August 2, 2013).
iTrackr was founded by Mr. Rizzo in 2006. The company developed software capable of tracking electronics inventory at local stores. Its shares are registered with the Commission and quoted on the OTC Link. Mr. Rizzo also purchased a British Virgin Islands shell company in 2006 called BVI in the complaint.
In 2008 and early 2009 Mr. Rizzo hired “boiler rooms” in Europe to solicit investments in iTrackr from U.K. citizens. The transactions were effected through the BVI entity. The paper work for the transactions was handled by Mr. Rizzo’s Florida based administrative assistant. The assistant furnished investors with wire instructions which directed investors to wire funds to various entities and individuals, including an escrow agent in San Diego. The money was then siphoned to a bank account in Belize controlled by Mr. Rizzo. About 120 investors purchased shares.
The Commission’s complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 22770 (Aug 5, 2013). The U.S. Attorney filed a parallel criminal action.
Second, FINRA settled with Oppenheimer & Co. in a proceeding which alleged that the investment firm permitted the sale of over a billion shares of twenty low-priced, highly speculative penny stocks that were unregistered. Specifically, from mid-August 2008 through mid-September 2010 Oppenheimer, through its branch offices across the country, permitted the sale of the unregistered shares. Customers deposited large blocks of penny stocks shortly after opening accounts and then liquidated the shares and transferred the proceeds out of the firm.
During the sales of unregistered securities, Oppenheimer missed a series of red flags, according to FINRA. The regulator determined that Oppenheimer’s systems and procedures governing penny stock transactions were inadequate and unable to determine if those shares were restricted or freely tradable. In addition, the firm’s anti-money laundering program did not focus on securities transactions and thus failed to monitor patterns of suspicious activity. The firm also failed to conduct adequate due diligence regarding a correspondent account for a broker-dealer customer in the Bahamas.
To resolve the proceeding the firm agreed to pay a penalty of $1.4 million. Oppenheimer will also retain an independent consultant to conduct a comprehensive review the pertinent firm procedures.