A wealth manager that’s under different ownership after letting go of hundreds of financial advisors as part of a compliance overhaul settled a FINRA case alleging it deceived investors.
National Securities generated hundreds of thousands of dollars in commissions by selling private placements managed by its affiliated RIA, National Asset Management, in December 2017 and January 2018 at more than double the listed price of the pre-IPO shares in “Company A,”
After acquiring a 56% interest in National parent National Holdings for $22.9 million in 2018, B. Riley Financial
When firms like National sell pre-IPO products managed by an RIA affiliate, the “incentive there is to get the shares out the door,” said Michael Edmiston, an attorney with Jonathan W. Evans & Associates who is the current president of the Public Investors Advocate Bar Association. He noted the FINRA allegations that National didn’t complete any due diligence for one offering and had no supervisor for the head executive in charge of sales of pre-IPO shares. The disgorgement and fine exceeds what National took in from the sales, FINRA’s order states.
“Those combined penalties are excellent because it makes the economics of failing to comply with FINRA rules and regulations and federal securities laws too expensive,” Edmiston said. “It’s a good message to the rest of the industry that this sort of investor abuse will not be tolerated.”
Representatives for Los Angeles-based B. Riley and National didn’t respond to requests for comment. Under the settlement, National didn’t admit or deny FINRA’s allegations.
The rollup of National Holdings under B. Riley Wealth Management has added significantly to the acquiring firm’s bottom line but also to its compliance concerns. Last year, the wealth manager’s total segment revenue soared by 423% to $382 million, while its income surged by 448% to $15.9 million,
On the other hand, National also displays a considerable disciplinary history. In its last case a year ago, National agreed to pay a fine of $3 million and undertake remediation steps after the New York State Department of Financial Services alleged it didn’t use multifactor authentication across its systems until August 2020,
FINRA’s settlement didn’t identify “Company A,” which issued pre-IPO shares managed by National’s RIA and sold by its brokers. The company had been “the subject of extensive speculation in the financial press” about a potential IPO in late 2017, according to the settlement. Furthermore, a section of the document on relevant disciplinary history listed a May 2011 case in which National settled the regulator’s allegations that it failed to conduct required due diligence and have a reasonable basis for recommending two earlier private offerings.
For the private placements issued by Company A, National sold $10 million worth of shares at the listed price of $9.75 per unit in one offering, according to FINRA. Then it sold a second round of pre-IPO shares that eventually drew $3.45 million worth of investments from 38 clients and netted “placement fees” of $405,500, the settlement order states. The cost came out to double the maximum stated price, investigators say. In addition, an executive with the initials “EK” led the pre-IPO shares without any formal supervisors at the firm, according to FINRA.
“In connection with the second offering, [National] misled its customers into believing that the offering had acquired, or would be able to acquire, shares of Company A, at a maximum price of $9.75,” the complaint states. “[National], however, had done no due diligence to determine if shares were available at that price from any seller.”
Costly and risky alternative investments carry the potential for outsize gains and losses, and they remain a
“As part of best practices, training should also include proper disclosures, especially for alternative investments,” Rosenfeld said in an email. “I say ‘especially’ because alternative investments generally have more risks than traditional stocks and bonds.”
