FINRA Fines Cantor Fitzgerald & Co. $6 Million for Selling Unregistered Microcap Shares, Related AML and Supervisory ViolationsDecember 22, 2015
The Financial Industry Regulatory Authority (“FINRA”) has fined Cantor Fitzgerald & Co. $6 million and ordered disgorgement of approximately $1.3 million in commissions in connection with the firm’s sales of billions of unregistered microcap securities between March 2011 and September 2012. Cantor Fitzgerald was also charged for failing to have adequate supervisory or anti-money laundering (“AML”) programs tailored to detect “red flags” or suspicious activity connected to its microcap activity in violation of FINRA Rules 3310(a), 3310(e) and 2010.
FINRA found that Cantor Fitzgerald made a business decision to expand its microcap liquidation business in March 2011, but it failed to ensure that its supervisory system included a reasonable and meaningful inquiry into whether these sales were lawful. FINRA concluded that Cantor Fitzgerald’s supervisory system was not reasonably designed to determine whether the microcap securities that the firm was liquidating for clients were registered with the Securities and Exchange Commission or subject to an exemption from registration. FINRA also determined that Cantor Fitzgerald did not adequately respond to a number of red flags. The Cantor Fitzgerald system failed to provide sufficient guidance and adequate training about when or how to inquire into whether a sale was exempt, and also had inadequate tools for supervisors to identify red flags associated with illegal, unregistered distributions. As a result, the firm’s sales of the thinly-traded, microcap securities were made without adequate review and due diligence. In fact, FINRA concluded, a significant portion of the sales were neither registered nor exempt from registration. These violations were accompanied by Cantor Fitzgerald’s failure to implement an adequate AML program tailored to detect red flags and patterns of potentially suspicious money laundering activity related to these sales. Although firm personnel received some AML training, FINRA concluded that the firm’s employees were not properly trained to detect, review and, if appropriate, cause SAR reporting of suspicious activity in microcap securities.
In addition, in keeping with recent trends seeking to impose individual responsibility for corporate violations, two of Cantor Fitzgerald’s executives were suspended and fined: the Executive Managing Director of Equity Capital Markets during the relevant period was suspended for three months in a principal capacity and fined $35,000 for supervisory failures, and an equity trader was suspended in all capacities for two months and fined $25,000. FINRA concluded that the Executive Managing Director knew that the firm’s expanding microcap business posed unique challenges and was generating an increasing number of regulatory inquiries, but nonetheless delegated his supervisory responsibilities to a central review group without taking sufficient steps to investigate the adequacy of their efforts.