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From Securities Regulation Daily, January 27, 2015

Oppenheimer to pay $20 million to settle charges related to penny stock sales

By Rodney F. Tonkovic, J.D. and Jacquelyn Lumb

The SEC announced today that Oppenheimer & Co., Inc. has agreed to pay $10 million to settle charges that it violated the books and records and registration provisions of the securities laws. According to the Commission, Oppenheimer engaged in two separate courses of conduct involving the sale of penny stocks for its customers that resulted in the violations. Oppenheimer will also pay an additional $10 million to settle a parallel action by the Treasury Department's Financial Crimes Enforcement Network (FinCEN) (In the Matter of Oppenheimer & Co., Inc.Release No. 33-9711, January 27, 2015).

Gibraltar Global Securities. The Commission found that between July 2008 and May 2009, Oppenheimer executed sales of billions of shares of penny stocks for an account in the name of a customer, Gibraltar Global Securities, Inc. According to the Commission, Oppenheimer knew that Gibraltar, a broker-dealer licensed in the Bahamas, was executing transactions and providing brokerage services for its customers, including customers in the U.S. As a result, Gibraltar acted as a broker in the U.S. despite not being registered with the Commission.

Gibraltar also presented Oppenheimer with a false IRS withholding form. The form purportedly exempted Gibraltar from U.S. tax withholding based on a false certification that Gibraltar was the sole owner of all of the income generated in its Oppenheimer account; this enabled Gibraltar's U.S. customers to avoid paying taxes. Oppenheimer, however, knew that Gibraltar's customers were the actual beneficial owners of the securities and knew, or should have known, that the IRS form was false. Because of the false form, plus the knowledge that many of Gibraltar's customers were in the U.S., Oppenheimer was required to begin withholding taxes from the gross proceeds from the sales of securities. It did not do so and therefore became liable for taxes it was obligated to withhold. The firm failed to record this liability and resulting expenses, which caused its books and records to become inaccurate.

Finally, Oppenheimer was also responsible for reporting Gibraltar's suspicious activity to (FinCEN) on Suspicious Activity Reports (SAR). Oppenheimer, however, failed to file the required SARs when suspicious activity occurred in the Gibraltar account.

As a result, the Commission found that Oppenheimer willfully aided and abetted and caused Gibraltar's violation of the registration provisions of the Exchange Act. Broker-dealers are required under Exchange Act Section 17(a) and Rule 17a-3 to maintain ledgers accurately reflecting liabilities and expenses, and Oppenheimer violated these provision through its failure to recognize liabilities and expenses arising from its failure to properly withhold and remit back-up withholding taxes from Gibraltar's sales. Finally, Oppenheimer's failure to file SARs was a violation of Section 17(a) and Rule 17a-8.

Registration violations. Next, Oppenheimer, through a registered representative, engaged in the unregistered distribution of the securities of six entities on behalf of a customer. The shares sold through the customer's account generated proceeds of approximately $12 million and $588,400 in commissions. No registration statement was on file or in effect for these offers and sales, and they neither complied with Rule 144 nor qualified for any exemption. Despite a number of red flags, Oppenheimer's personnel did not conduct a searching inquiry to determine whether the transactions were exempt. And, in failing to have in place policies and procedures designed to detect and prevent violations of Section 5, the firm failed reasonably to supervise.

In an accompanying press release Andrew J. Ceresney, Director of the SEC’s Division of Enforcement stated: "Despite red flags suggesting that Oppenheimer’s customer’s stock sales were not exempt from registration, Oppenheimer nonetheless allowed unregistered sales to occur through its account, failing in its gatekeeper role" Ceresney added that the "actions against Oppenheimer demonstrate that the SEC is fully committed to addressing lax AML compliance programs at broker-dealers through enforcement action.  The sanctions imposed on Oppenheimer, which include admissions of wrongdoing and $20 million in monetary remedies, reflect the magnitude of Oppenheimer’s regulatory failures.”

Oppenheimer was censured and ordered to cease and desist from violations of Securities Act Section 5 and of Exchange Act Sections 15(a) and 17(a) and Rules 17a-3 and 17a-8. The firm was also ordered to pay $4,168,400 in disgorgement, $753,471 in prejudgment interest, and $5,078,129 in civil penalties, for a total of $10 million. The Commission noted that an additional $10 million penalty would be appropriate but did not order one in light of a penalty paid by Oppenheimer to FinCEN for related violations. Oppenheimer also consented to retain an independent compliance consultant.

The SEC's remarks. In a news conference following the announcement of the charges against Oppenheimer, Jennifer Shasky Calvery, a director at the Financial Crimes Enforcement Network, echoed remarks by SEC Enforcement Director Andrew Ceresney that the penalty reflects both the duration and severity of Oppenheimer’s conduct, plus the fact that it is a repeat violation. FinCEN charged Oppenheimer for deficiencies in its anti-money laundering program in 2005. Oppenheimer was also the subject of previous SEC enforcement actions in 2012 and 2013.

Calvery said that FinCEN’s advice to corporate boards is to start with a culture of compliance in which the board and senior leaders take compliance seriously. She said that FinCEN has published an advisory that addresses the dangers of siloing—where information is not shared across an organization as occurred in the Oppenheimer matter.

Ceresney said the imposition of an independent consultant to review Oppenheimer’s policies and procedures over a five-year period is a fairly common practice, especially where a broker-dealer or investment adviser engaged in misconduct and the SEC does not have confidence in the procedures it has in place. The five-year period was a judgment call based on Oppenheimer’s conduct and prior history, according to Cereseny. He acknowledged that five years is at the high end of the period that has been imposed on firms, but said it is not unprecedented

Ceresney acknowledged that Oppenheimer had been granted a waiver from disqualification under Securities Act Regulation D. The waiver, granted by the Division of Corporation Finance, was based on its agreement to retain a law firm to review its policies and procedures relating to Rule 506 offerings. Oppenheimer also agreed to adopt changes in its wealth management business and to complete firm-wide training for all of its registered persons with respect to compliance with Rule 506.

Neither Ceresney nor Calvery would comment on whether any individuals would be subject to enforcement actions, but both noted that the investigation is continuing.

The release is No. 33-9711.

Companies: Gibraltar Global Securities, Inc.; Oppenheimer & Co. Inc.

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