For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA") and without admitting or denying the findings, prior to a regulatory hearing and without an adjudication of any issue, James Sloan Altschul submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of James Sloan Altschul,Respondent (AWC 2009019108904, January 31, 2012).
First registered in 1997, on January 5, 2010, James Altschul became the Chief Compliance Officer and the AML Compliance Officer at the New York branch of First Merger Capital, Inc., where he worked until May 3, 2010. In his compliance officer roles, Altschul was the NY branch's designated supervisor, with responsibility for, among other matters, reviewing new customer account applications and the sales and trading activities of registered representatives; and investigating possible money laundering and taking necessary corrective action.
During Altschul's tenure at First Merger,China-based Deer Consumer Products, Inc. ("DEER") was the most heavily solicited security by First Merger's registered representatives, and he knew that the reps in the NY branch were actively soliciting customers. By February 2010, Altschul learned that DEERintended to pay $350,000 for certain unspecified services to entities controlled by the operators of First Merger's NY branch. Those operators were in the process of becoming owners of the firm.
SIDE BAR: According to the "Company Profile" on DEER's website:
A Market Leader in the Small Household Appliances Industry:
Deer Consumer Products, Inc. is a NASDAQ Global Select Market listed U.S. company with its primary operations in China. Deer has a 17-year operating business as well as a strong balance sheet. Operated by Deer's founders and supported by more than 100 patents, trademarks, copyrights and approximately 2,000 staff, Deer is a leading provider of "DEER" branded consumer products to Chinese consumers and leading vertically integrated manufacturers of small home and kitchen appliances for global customers. DEER's product lines include series of small household and kitchen appliances as well as personal care products designed to make modern lifestyles easier and healthier. With a large brand name global clientele and a rapidly expanding China domestic market footprint, Deer's extensive China domestic market distribution channels are a direct access to China's wealthier and expanding consumer markets. In 2011, Deer initiated annual cash dividend payment of $0.20 per share, payable quarterly beginning in the first quarter of 2011.
$76 Million Underwritten Public Offering of Common Stock at $11 Per Share:
Wall Street investment banks William Blair & Co. andBMO Capital Markets led and completed a $17 million underwritten public offering of Deer's common stock in December 2009. Supported by such funding, Deer has recognized rapid sales and earnings growth in the recent years while maintaining a strong balance sheet and healthy margins across its extensive product lines. Deer's growth strategy is focused on expanding the high margin, China domestic market sales.
From February 2010 through May 3, 2010, registered representatives at the NY branch, working under the direction of some of the operators of the branch office, solicited from First Merger customers about $674,184 in DEER securities purchases; however, the AWC asserts that the soliciting representatives did not disclose that the branch operators had received $350,000 in compensation from DEER. Allegedly, Altschul took no steps to require such disclosure.
In February 2010, counsel for another publicly-traded China-based company, SmartHeat, Inc. ("HEAT"), referred four Chinese customers (purportedly current or former employees of the issuer) to First Merger. The AWC alleges that HEAT's U.S. counsel obtained customer signatures on new account forms and supplied supporting documentation. According to their new account documents, three of the four Chinese customers had annual incomes between $25,000 and $50,000 and the fourth had an income between $50,000 and $100,000. Additionally, each of the customers was represented as having a net worth of between $50,000 and $100,000; and a liquid net worth of between $25,000 and $50,000.
Before approving the opening of the four accounts, Altschul purportedly never spoke to the customers or confirmed the accuracy of the various representations. Also, no one from the firm ever had any direct contact with any of the customers during the time their accounts were open at First Merger.
On February 18, 2010, the four customers deposited collectively over 3.8 million shares of HEAT. The AWC alleges that pursuant to powers of attorney he obtained, HEAT's CEO (through US counsel) directed First Merger to begin selling the HEAT shares from the four accounts beginning on February 24, 2010. Thereafter, until Altschul left First Merger on May 3, 2010, the four customers collectively sold over $23 million of HEAT stock, via the CEO's instructions.
SIDE BAR: HEAT's "About SmartHeat" page on its website offers this explanation:
We are a U. S. public company operating under U. S. corporate governance"
Smartheat is a Nevada registered company involved primarily in the research, production, manufacture, and sale of plate heat exchange products [PHE]. Our PHE products are utilized in industrial, commercial and residential applications.
PHEs are highly versatile products. They are commonly used in power generation and chemicals processing industries as well as shipping, automotive, petroleum refinement and derivative products, electric power and HVAC generation & distribution, edible oils, metallurgy, electronics, and food & beverages. . .
The only transactions that occurred in the four subject accounts were the HEAT sales, which generated over $1.1 million in commissions for First Merger (about 75 percent of all commissions earned during Altschul's tenure). The AWC alleged that the above activity constituted multiple red flags that should have alerted Altschul to take action." Consequently, FINRA alleged that Altschul failed to adequately monitor, analyze, and investigate the suspicious HEAT transactions in order to determine if it was appropriate to file a Suspicious Activity Report ("SAR-SF") form. By engaging in the conduct described above, the AWC alleged that Altschul violated NASD Rule 3010 and FINRA Rules 2010 and 3310.
Accordingly, FINRA imposed the following sanctions:
For the purpose of proposing a settlement of rule violations alleged by FINRA and without admitting or denying the findings, prior to a regulatory hearing and without an adjudication of any issue, Maureen Hanley Gearty submitted an AWC, which FINRA accepted. In the Matter of Maureen Hanley Gearty,Respondent (AWC 2009019108903, January 31, 2012).
First employed in the securities industry in 1978, Maureen Gearty subsequently was registered as a Series 7, 55, and 63 with First Merger from November 9, 2009 through May 2, 2011. In April 2010, Gearty signed an agreement with First Merger and two other persons registered with the firm in which the parties arranged to have the firm directly pay her $350,000 for commissions and branch office expenses - apparently the agreement did not specify actual amounts of commissions to be paid to each of the signatories or actual amounts of branch office expenses to be covered.
In April 2010, First Merger wired $350,000 into Gearty's bank account. First Capital's records reflect the payment as having been made solely to Gearty and representing commissions primarily earned from the sales by four customers of a large number of shares of SmartHeat, Inc. ("HEAT"). Gearty and the two other persons who signed the agreement were the designated representatives on the four customer accounts and purportedly shared the commissions earned equally.
After receiving the $350,000, Gearty wired $100,000 each to the two other representatives, as payment for commissions they had earned from the customers' sales of HEAT securities. Within two weeks, Gearty also wired at least $84,000 of the $350,000 commission payment to a person not registered with FINRA. The unregistered person was the spouse of a person associated with the firm who was not registered with the firm during the time the commissions were earned. The AWC alleges that Gearty retained no amount of the $350,000 as commissions for herself.
As a result of the above cited activities, the AWC alleged that Gearty aided First Merger in failing to make and keep books and records that accurately reflected the commissions and expenses that it paid. Accordingly, she was charged with having violated NASD Rule 3110 and FINRA Rule 2010 by causing the firm to violate SEC Rules 17a-3 and 17a-4. Further, by paying at least $84,000 to an unregistered, Gearty violated NASD Rule 2420 and FINRA Rule 2010.
According to the terms of the AWC, FINRA imposed the sanctions of:
Because Gearty submitted a sworn financial statement and demonstrated an inability to pay, no fine was imposed in consideration of her financial status.
What FINRA's Altschul and Gearty cases portend is an expanding regulatory investigation of First Merger Capital and/or its registered staff; after all, the two docket numbers for these AWCs are 20090191089-04 (Sloan) and -03 (Gearty) and both respondents have agreed to cooperate in ongoing investigations of matter #20090191089. We can hardly not wonder what's going on with -01 and -02. Our interest is piqued - how widespread among the FINRA member firm community are the alleged practices cited in these two settlements?
For quite some time, China stocks have been all the rage. You could hardly find an investor who hasn't dabbled, at least once, in some supposedly "hot" Chinese stock; and being invested in the FXI exchange traded fund was almost the norm. And then we began reading about problems and inconsistencies. Some funny accounting. Some dubious dealings. Add into that mix a number of investigations and warnings about so-called Reverse Merger China Stocks and investors were left with an uncomfortable feeling.
Of course, what major stock markets haven't had questions raised about their integrity in the past few years? And, go ahead, you show me a supposedly reputable exchange or automated quotation system that hasn't had a recent dalliance with unscrupulous listing practices or lax enforcement. So, no, I'm not convinced that China's issuers are less or more fraudulent than any other country's - to that extent, we've fully welcomed this emerging economic superpower to the big boys' table, replete with all the garbage that comes with such dramatic growth. It's not as if stock promoters and stock promotion don't bedevil U.S. issuers. Street Sweeper recently reported about such practices in the U.S. : Wall Street Eugenics : SEC Charges Microcap Fraud . . . again (January 23, 2011).