Aegis Capital Sanctioned Over Failing to Supervise Penny Stock Transactions

The Financial Industry Regulatory Authority (FINRA) fined (Case No. 2011026386001) brokerage firm Aegis Capital Corp. (Aegis) concerning allegations that between April 2009 and June 2011, Aegis liquidated nearly 3.9 billion shares of five microcap stocks that seven customers deposited into their accounts at the firm. FINRA found that the shares were not registered with the SEC, nor were the transactions exempt from registration. FINRA determined that the customers generated over $24.5 million in proceeds and Aegis received over $1.1 million in commissions.

Aegis is a retail and institutional broker-dealer and a FINRA member and has been since 1984. The firm is headquartered in New York City, maintains 16 branch offices, and has approximately 415 registered persons. Most of Aegis’ brokers work from its offices in Melville, New York and New York City.

Charles Smulevitz (Smulevitz) entered the securities industry in February 2006. On June 1, 2009, Aegis filed a Form U4 for Smulevitz, commencing his association with it and on July 20, 2012, Aegis filed a Form U5 for Smulevitz, terminating his association with it. While associated with Aegis, Smulevitz was registered as a General Securities Representative (GSR) and General Securities Principal (GSP). Kevin McKenna (McKenna) entered the securities industry in 1981. On June 9, 2010, Aegis filed a Form U4 for McKenna commencing his association with it. McKenna currently is registered with Aegis as a GSR, General Securities Sales Supervisor, General Securities Principal Sales Supervisor, and Operations Professional.

FINRA’s allegations revolve, in part, concerning third-party by the initials “ML” who was not a client of Aegis, but referred each of the seven customers to Aegis involved in the illegal transactions. FINRA also alleged that ML controlled the activity in these accounts. According to FINRA ML had been the subject of three significant regulatory actions. For instance, in a 2008 civil case, the SEC charged ML with aiding and abetting securities fraud and participating in a scheme to evade the registration requirements, the same type of misconduct that formed the basis for FINRA’s charges against Aegis. In November 2009, ML settled the SEC action for significant sanctions that included a five-year bar from participating in penny stock offerings. In another proceeding the SEC barred ML from associating with any broker or dealer. In a separate 2004 action, the NASD barred ML for failing to cooperate with an investigation.

FINRA alleged that the activity in the seven referenced accounts followed the same pattern. The steps were a third party acquired a debt instrument from the issuer, the third party held the instrument for a period of time, the customers then acquired the debt instrument from the third party and negotiated with the issuer to make the debt instrument convertible to stock, the customers then deposited the shares of the microcap stocks into their accounts at Aegis, liquidated the shares, and finally wired the proceeds out of their accounts. FINRA found that the sales of the five microcap stocks by the seven customers amounted to a significant percentage of the outstanding shares of each stock and were part of a scheme to evade the registration requirements

FINRA found that Aegis, Smulevitz, and McKenna during their respective tenures as the firm's Chief Compliance Officer (CCO) failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures reasonably designed to comply with the registration requirements of microcap stocks.

Investors who have suffered losses may be able recover their losses through securities arbitration. The investment attorneys at Gana LLP are experienced in representing investors in cases where their broker has acted inappropriately. Our consultations are free of charge and the firm is only compensated if you recover.