FINRA fines Scottsdale Capital $1.5-million (U.S.)
2017-04-12 10:42 ET - Street Wire
Also Street Wire (U-VPLM) Voip Pal.com Inc
by Mike Caswell
The Financial Industry Regulatory Authority has imposed a $1.5-million penalty on Arizona brokerage Scottsdale Capital Advisors Corp. and has permanently banned its owner, John Hurry. (All figures are in U.S. dollars.) FINRA found that Scottsdale facilitated the sale of tens of millions of unregistered shares in penny stocks while ignoring indications that insiders were behind the sales. The shares that it sold included those of a Vancouver-linked OTC Markets company, Voip Pal.com Inc.LINKED IN
The sanctions are contained in a 111-page decision that FINRA released on March 31, 2017. The decision is a loss for Mr. Hurry and for Scottsdale, which had claimed that it was simply the broker on the sales. The firm also said that it had adequate procedures in place to detect insider activity, and would not accept deposits that involved more than 10 per cent of a company's shares.
FINRA, however, has found that Scottsdale ignored many indications that it was selling shares for insiders in unregistered transactions. The firm allowed sellers to operate through nominees and through an entity incorporated in the Cayman Islands. Its way of doing business amounted to "institutionalization of the misconduct," FINRA has found. Scottsdale's procedures only created the appearance of compliance.
The sanctions stem from Scottsdale's sale of shares in three companies, including Voip Pal.com, in 2013 and 2014. According to FINRA, the sales generated $1.7-million in proceeds. It should have been clear to Scottsdale that the share transactions leading to those sales required some investigation, the decision states. Insiders (who would normally be subject to heightened reporting requirements) looked to be connected to the selling, according to FINRA.
With Voip Pal.com, most of the shares were initially issued to an entity controlled by the company's former president, Vancouver resident Richard Kipping. (Mr. Kipping is not a respondent in FINRA's case, and the regulator has not made any finding against him.) In accepting the shares for deposit and subsequent sale, Scottsdale made little effort to determine if Mr. Kipping was an insider, FINRA says. The firm knew that he had been Voip Pal.com's president, but it did nothing to determine if he remained an insider. It did not obtain his resignation letter or even a date for his resignation, according to FINRA.
Even more important, Scottsdale ignored indications that Mr. Kipping remained an insider through his ownership of more than 10 per cent of the company's shares, FINRA says. Documents in Scottsdale's possession showed that Mr. Kipping had received 80 million shares of Voip Pal.com in the two years prior to that date. That amounted to 10.99 per cent of the company's total issued shares. The circumstances raised a strong suspicion that Voip Pal.com was "unlawfully distributing securities without registration in a two-step process designed to obscure what was actually happening and who was benefiting from the sales of stock," the decision states.
While FINRA's decision mostly cites Mr. Hurry and Scottsdale for selling shares in Voip Pal.com and two other companies, the decision indicates that Mr. Hurry was engaged in other dubious dealings. In 2013, he set up an entity in the Cayman Islands that he named Cayman Securities Clearing and Trading SECZ Ltd. According to FINRA, he formed Cayman Securities to act as a conduit for offshore institutions to deposit shares at Scottsdale for eventual sale into the U.S. markets. Over a seven-month period, Cayman Securities deposited billions of shares with Scottsdale, FINRA says.
The risky nature of those dealings was exposed in the summer of 2014, according to the decision. The U.S. Securities and Exchange Commission and criminal authorities began proceedings against some customers of Scottsdale and Cayman Securities. After those charges became public, the business of Cayman Securities substantially declined, FINRA says.
(Included in those actions was an indictment filed in New York on Sept. 8, 2014, against an Oregon man named Bob Bandfield. Prosecutors claimed that Mr. Bandfield ran a massive money laundering operation that contributed to the manipulations of over 40 publicly traded companies. He set up an offshore system that allowed insiders of U.S. companies to hide their share positions and launder the proceeds from share sales. He pleaded guilty, and is now serving six years in jail. His co-defendants included West Vancouver's Gregg Mulholland and Kelowna's Phil Kueber. Both also pleaded guilty, with Mr. Mulholland receiving 12 years in jail and Mr. Kueber awaiting sentencing.)
Meanwhile Mr. Hurry and his wife were profiting substantially, according to FINRA's decision. In the year ended June 30, 2014, the firm paid $6.2-million in compensation to its directors. Since Mr. Hurry and his wife were the only directors, this money must have gone to them, FINRA says.
While much of the decision deals with violations of securities rules, it also contains a few snippets that show Mr. Hurry's relationship with his employees was not always a fond one. Two of those employees stated that he would contact them at all times of the day and on weekends. If he could not reach them, he would start to send demanding, abrupt and increasingly impatient e-mails. In one e-mail, he wrote: "Your phone is not working TURN IT ON. I need a call." Another read: "Call me in 60 minutes. DO YOU NOT UNDERSTAND THAT?" Mr. Hurry also maintained a spreadsheet that detailed much of their activity, including the amount of time that they spent on cigarette breaks.
The ban for Mr. Hurry prevents him from associating with any FINRA member in any capacity. In effect, he can no longer be a brokerage employee. FINRA also fined two Scottsdale employees, Timothy DeBlasi and Michael Cruz. They each must pay $50,000 and serve a two-year ban.
Voip Pal.com remains an active company, listing an address in Bellevue, Wash. The stock closed at four cents Monday. The company was not a respondent in the case or in any other action.
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