The NASD imposed a $200,000 fine against EKN Financial Services Inc. and levied sanctions against the firm’s CEO, President, Head Trader and Financial and Operations Principal for improper short selling in connection with three unregistered PIPE securities offerings. As part of the settlement, EKN was also suspended for six months from engaging in transactions in PIPES.
“This action represents NASD’s continued commitment to ensuring that those firms and individuals who engage in improper activity involving PIPE trading will be held accountable,” said the NASD’s Head of Enforcement. “Suspending the firm for six months from future PIPE deals illustrates the seriousness with which we view these violations.”
A PIPE is a private offering in which accredited investors agree to purchase restricted, unregistered securities of public companies. The companies agree, in turn, to file a resale registration statement so that investors can resell the shares to the public. Only after the PIPE shares registration is approved by the Securities and Exchange Commission (SEC) are investors free to sell them on the open market.
EKN (formerly known as Ehrenkrantz King Nussbaum, Inc.) reportedly agreed to purchase shares in registered securities, then immediately short positions in the stock without either owning unrestricted shares or borrowing unrestricted shares to cover the short sales. When the PIPE shares were later registered, it covered the short positions.
In addition to the PIPE-related violations, NASD also found that EKN failed to maintain adequate written supervisory procedures and records, including research activities. The regulators also found that EKN failed to report certain customer complaints to NASD, violated net capital rules and allowed transactions through an unregistered agent.
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