Revere Securities LLC has been fined for anti-money laundering (AML) and supervisory failures, the Financial Industry Regulatory Authority announced.
The infractions involved small-cap initial public offerings (IPOs) for foreign-based issuers. FINRA found that Revere acted as a lead underwriter or selling group member for foreign-based, small-cap IPOs that showed indications of potential “ramp-and-dump” schemes. It was alleged that the firm failed to detect and report potentially suspicious transactions related to those issuers, and did not have a reasonable customer identification or due diligence program.
In ramp and dump schemes, fraudsters to take control of low-priced or thinly traded stocks, push their prices sharply upward, and then sell their holdings for profit. When the price falls afterward, ordinary investors are often left with significant losses.
As a result of FINRA’s findings, a settlement was reached in which Revere was fined $800,000 and was required to retain a third-party consultant to conduct a review of compliance with FINRA rules, obtain a report from the consultant with recommendations on how to remediate its supervisory procedures and systems, and implement those recommendations.
“Ramp-and-dump schemes are a direct threat to investors and to the integrity of U.S. markets, and broker-dealers that underwrite or distribute offerings for these issuers are on the front lines of defense,” said FINRA’s Executive Vice President and Head of Enforcement. “When a firm builds its core underwriting business around IPOs of this type, it must implement robust compliance controls tailored to the risks and take seriously its responsibility to detect and investigate suspicious activity. At FINRA, we remain vigilant in identifying, investigating and addressing risks involving small-cap issuers and the firms that serve them.”
FINRA noted that Revere has served as a lead underwriter or selling group member in IPOs for predominantly foreign-based small-cap issuers, more than 40 of which involved issuers that operated in Hong Kong or China. “In some of Revere’s small-cap IPOs, the issuers’ stock prices experienced significant, unusual price increases immediately after the IPO before rapidly collapsing, resulting in millions of dollars in secondary market losses,” the authority stated. “Trading in Revere accounts bore multiple indications of potential manipulation, including coordinated trading and trading a significant portion of the daily volume.”
Though customers for these offerings included those from foreign jurisdictions, it was determined that Revere did not have adequate procedures to verify its customers’ true identities.
According to FINRA multiple sets of seemingly unrelated customers opened new accounts on the same dates, reported living at the same residential addresses, and then proceeded to engage in identical, or substantially similar, trading patterns in the same issuers.
In one instance, the company allocated over $1.5 million work of IPO shares to just eight customers referred to the company by a foreign broker-dealer. Four of those account holders claimed to be unemployed yet recorded income exceeding $200,000 annually, and seven of the eight applications contained contradictory information about the source of the deposited funds. Despite this, FINRA said Revere opened the accounts without verifying the customers’ information.
On IPO day, the stock surged 318 percent before collapsing more than 50 percent by the close of the market. All eight customers sent emails on the same day directing Revere to liquidate their shares from IP addresses that could be tracked back to countries other than where the customers purportedly lived. Revere did not identify any of these factors as potentially suspicious.
Revere did not admit or deny the charges but consented to the entry of FINRA’s findings. Prior to the letter of acceptance, waiver and consent, regulators said Revere had already engaged a third-party consultant to review and recommend changes to Revere’s AML program.
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