SEC settles with company distributing unregistered shares

Securities Enforcement SARs SEC

On December 15, the SEC announced a settlement with a California-based broker-dealer for allegedly unlawfully distributing nearly 100 million unregistered shares of over 50 different low-priced microcap companies, and for the company’s failure to file suspicious activity reports (SARs) regarding those transactions. According to the SEC’s order, the company violated Sections 5(a) and 5(c) of the Securities Act, which “make it unlawful for any person, directly or indirectly, to offer or sell securities by any means or instruments of transportation or communication in interstate commerce unless a registration statement has been filed with the Commission with respect to Section 5(c) and is in effect with respect to Section 5(a),” by engaging in unregistered offers and sales of large blocks of low-priced securities by an offshore customer from January 2017 through September 2018. The order also noted that the company could not rely on an exemption under Section 4(a)(4) of the Securities Act, which would apply to the company “only if, after conducting a reasonable inquiry into the facts surrounding the sales at issue, [the company] was not aware of facts indicating that its offshore customer was engaging in an unlawful distribution of securities,” since the company allegedly failed to conduct a reasonable inquiry. Additionally, the company violated Section 17(a) of the Exchange Act and Rule 17a-8 thereunder by failing to file SARs for certain suspicious transactions that it executed on behalf of its offshore customer. The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of $1,000,000, a total of $173,508.40 in disgorgement, and $34,332.16 in prejudgment interest. The order also directs the company to engage an independent compliance consultant “to conduct a comprehensive review of, and to report and make recommendations as to, the effectiveness, construction and implementation of [the company’s] supervisory, compliance, and other policies and procedures reasonably designed to prevent violations of the federal securities laws by [the company] and its employees.” The order provides that the company will “cease and desist from committing or causing any violations and any future violations of Sections 5(a) and 5(c) of the Securities Act and Section 17(a) of the Exchange Act and Rule 17a-8 promulgated thereunder.”