Did You Hear the One About the CEO, His Parents, and His Divorced Sister?

January 7, 2010

I often complain about poorly drafted regulatory decisions; however, last month, the Securities and Exchange Commission (SEC) published a gem In the Matter of the Application of Kirlin Securities, Inc., Anthony Kirincic, and Andrew Israel  (Opinion, Securities Exchange Act of 1934 Rel. No. 61135 / Admin. Proc. File No. 3-13422 / December 10, 2009).  In Kirlin, the SEC considered an appeal from a Financial Industry Regulatory Authority ("FINRA") disciplinary action involving the following respondents:

  • Kirlin Securities, Inc., formerly a broker-dealer registered with FINRA;
  • Anthony Kirincic, Kirlin's co-chief executive officer; and
  • Andrew Israel, Kirlin's head equity trader

Out of the Fire and Into the KILN

During a five-week period in early 2002, after learning that Kirlin Securities' publicly-traded parent  Kirlin Holding Corporation's ("KILN's") declining bid price threatened to cause the company to be delisted by NASDAQ, Kirincic, with Israel's assistance, placed more than 100 orders to buy shares of KILN to artificially increase its stock price.

Kirincic, whose trades accounted for the vast majority of volume in the thinly-traded KILN, raised KILN's closing bid price over $1.00 for a sustained period and successfully prevented the company from being delisted. In addition, Kirincic admittedly signed his parents' names to certain documents that, among other things, facilitated the transfer of cash to his sister's account to help fund the manipulative purchase orders Kirincic was placing. 

Israel, who was involved in Kirincic's scheme to inflate KILN's price, failed to provide best execution to a Kirlin customer who placed an unexpected and substantial order to liquidate his KILN shares that threatened to depress the inflated price of KILN.

Half-Baked Stock Price

Okay, so just to recap the action so far, KILN's price is going into the toilet and the firm faces delisting - that is, unless, someone, somehow, can magically move the per share price higher.  Amazingly, this happens, thanks to the efforts of the firm's CEO, some of his parents' cash, his sister's account, and, well - geez, you really should read this case; it's more intriguing than many a potboiler on today's bookshelves. 

FINRA OHO Decision

In the Matter of FINRA's Department of Enforcement, Complainant, v. Kirlin Securities, Inc., Anthony J. Kirincic, David O. Lindner, and Andrew J. Israel  (Decision, FINRA Office of Hearing Officers Extended Hearing Panel, Complaint EAF0400300001 / /November 28, 2007) https://www.finra.org/sites/default/files/OHODecision/p038226_0.pdf, the Syllabus states:

Respondent Kirincic engaged in market manipulation, in violation of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder and Rules 2110 and 2120, and falsified customer signatures on stock certificates and letters of authorization, in violation of Rule 2110. For these violations, Respondent Kirincic is barred. Charges that Kirincic failed to establish, maintain and enforce an adequate supervisory system and written supervisory procedures, in violation of Rules 2110 and 3010(a) and (b), are dismissed. 

Respondent Lindner failed to comply with best execution requirements for a customer order, in violation of Rules 2110 and 2320. For this violation, Respondent Lindner is barred. Charges that Lindner failed to establish, maintain and enforce an adequate supervisory system and written supervisory procedures, in violation of Rules 2110 and 3010(a) and (b), are dismissed. 

Respondent Israel engaged in market manipulation, in violation of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder and Rules 2110 and 2120, and failed to comply with best execution requirements for a customer order, in violation of Rules 2110 and 2320. For these violations, Israel is barred.

Respondent Kirlin Securities engaged in market manipulation, in violation of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and Rules 2110 and 2120, and failed to comply with best execution requirements for a customer order, in violation of Rules 2110 and 2320. For these violations, Respondent Kirlin Securities is expelled. Charges that Kirlin Securities failed to establish, maintain and enforce an adequate supervisory system and written supervisory procedures, in violation of Rules 2110 and 3010(a) and (b), are dismissed. 

Respondents Kirlin Securities, Lindner, and Israel shall jointly and severally pay restitution in the amount of $26,163, in connection with their violation of best execution requirements under Rules 2110 and 2320. 

FINRA NAC Decision

Following the appeal of the OHO Decision, FINRA's National Adjudicatory Council ("NAC") affirmed the findings. In the Matter of FINRA's Department of Enforcement, Complainant, v. Kirlin Securities, Inc., Anthony J. Kirincic, David O. Lindner, and Andrew J. Israel  (Decision, FINRA Office of Hearing Officers, Complaint EAF0400300001 / /February 15, 2009)  http://www.finra.org/sites/default/files/NACDecision/p118029.pdf. The NAC modified some aspects of the sanctions as follows:

[F]or Kirlin's, Lindner's, and Israel's failure to comply with best execution requirements, we reduce the expulsion and bars imposed by the Hearing Panel to one-year suspensions, and order that Lindner requalify in all capacities. We affirm the Hearing Panel's imposition of $26,163 in restitution in connection with the best execution violations, and the Hearing Panel's assessment of costs against respondents. 

at Page 2 of the NAC Decision

SEC Appeal

Respondents Kirlin Securities, Kirincic, and Israel appealed the NAC's findings and sanctions to the Securities and Exchange Commission ("SEC"). Following its appellate review, the SEC sustained FINRA's findings of violation, however, it did modify some of the sanctions. In the Matter of the Application of Kirlin Securities, Inc., Anthony Kirincic, and Andrew Israel  (Opinion, Securities Exchange Act of 1934 Rel. No. 61135 / Admin. Proc. File No. 3-13422 / December 10, 2009). 

Kirincic: The SEC sustained the bar for fraudulent manipulation of the market but set aside a separate bar for improperly signing customer names to transactional documents.

Israel: The SEC set aside the bar imposed for fraudulent manipulation of the market and reduced that sanction to a bar with the right to apply for re-entry after five years.

Israel and Kirlin: The SEC set aside the restitution order of $26,163 plus interest.

Kirlin: The SEC sustained the expulsion. 

Bill Singer's Comment: 

This case is interesting for a number of reasons.  For starters, the SEC's 39-page Opinion is well written, details the facts with painstaking accuracy, sets forth that applicable laws in a convincing fashion, and, all in all, is as compelling an opinion as I have seen from the SEC in many, many years.  Additionally, this case provides a behind-the-scenes glimpse of practices that are perhaps far too common on Wall Street.  Prepare for quite an education. Among the more interesting tid-bits, you will learn that:

[T]he next trading day, Monday, March 18, Kirincic began placing orders to purchase substantial amounts of KILN stock for his sister, Susan Paduano, and would continue to do so through April 22 (the "Trading Period"). Kirincic, who testified that he exercised time and price discretion over Paduano's orders and also determined how to route them in the market, placed most of these orders not through Herzog but through BRUT, an electronic communications network ("ECN"), for execution. A significant feature of trading on ECNs, as Applicants' expert explained, is that, when a broker places an order with an ECN at a price above the highest, or "inside" bid, the ECN automatically displays that bid as its own, creating a new inside bid price that is displayed to the market. According to Applicants' expert, of the 65 orders Kirincic placed for Paduano on the BRUT ECN during the Trading Period, 41 of them were priced at or above the inside bid, and an additional 20 of them were priced at or above the inside ask; more than 93% of Kirincic's orders were therefore responsible for setting a new inside bid. Paduano's KILN purchases would total over $200,000 in a five-week period, account for 43% of the total trading volume in KILN, and increase the price of KILN over 57%. 

In March 2002, Paduano was divorced, unemployed, caring for three children, and receiving as income only $3,600 per month in alimony. She nevertheless testified that she gave instructions to Kirincic to purchase shares in large dollar amounts, such as $25,000 or $50,000, depending on what she was "comfortable with" at the time.17 During the hearing, neither Paduano nor Kirincic could recall specific details about any of the orders she gave Kirincic.18 Although Paduano had not been an active purchaser of KILN shares in the four years preceding 2002 and had purchased none in January or February 2002,19 she testified that she wanted to acquire KILN stock because "it was [her] desire to always hold a large position in the company" that her ex-husband (formerly a partner of Kirincic and Lindner) and brother had built. The KILN shares were intended, she said, to be a "legacy for my children." Although each of Paduano's children had a custodial account at another financial institution, all the KILN purchases Paduano made in 2002 were bought through her own account at Kirlin. There is no evidence that Paduano transferred any of the acquired KILN shares to her children's accounts . . .