Broker-Dealer Litigation - Greenberg Traurig LLP

The hearing panel found that for nearly a year, the President was required to adhere to
heightened supervisory requirements imposed by FINRA and various state securities regulators.
Because the President controlled the firm, however, we was able to “sidestep” the requirements
of heightened supervision. The firm, for its part, failed to ensure that the heightened supervision
requirements were being followed, and by failing to have a system to monitor same, the hearing
panel found the firm to be in violation of Rule 3010(a).
Moreover, the firm admitted that it did not comply with Rules 3012 and 3013, in part
because, as the President testified, he did not know what the rules were. Even so, as President,
he was responsible for the establishment, maintenance and enforcement of a system of
supervisory control policies and procedures, and was required to make the designations and
certifications required by Rules 3012 and 3013. He and the firm were both found to have
violated both Rules and Rule 2110.
For his personal violations pertaining to failing to answer questions during his OTR
examinations and circumvented his own heightened supervision requirements, the President was
barred. Because of the bars, the hearing panel did not sanction him for the supervisory
violations. The firm, however, was censured and fined a total of $60,000 for all violations.
Department of Enforcement v. ACAP Financial, Inc., Disciplinary Proceeding No.
2007008239001, 2011 FINRA Discip. LEXIS 32 (OHO, May 3, 2011).
Respondent ACAP Financial was charged with selling unregistered securities in violation
of Section 5 of the Securities Act. Respondent ACAP and respondent Hume, ACAP’s
compliance officer and head trader, were charged with violating Conduct Rules 3010 and 2110
by failing to reasonably supervise a registered representative in connection with the sale of
unregistered securities and by failing to establish, maintain, and enforce written supervisory
procedures reasonably designed to achieve compliance with the applicable securities laws and
regulations.
ACAP had stipulated to the supervisory violations alleged in the Department’s complaint.
The firm failed to ensure that the representative performed sufficient inquiry to determine
whether the customers’ unregistered shares could be sold in compliance with Section 5. The
firm also failed to make any reasonable inquiry into whether the customers were underwriters or
whether the transactions were a part of a distribution, instead relying on the lack of a restrictive
legend on the stock certificates and the clearance through transfer without restriction. Moreover,
the firm did not have any written or formal procedures regarding restricted stock transactions or
the receipt of certificates. As the firm’s Compliance Officer, the hearing panel found Hume to
be responsible for creating and maintaining its written supervisory procedures. They found that
he failed to take appropriate action to cause the firm to adopt and implement appropriate
procedures for handling the sale of stock deposited in certificate form without restricted legends.
P.2
396