The Financial Industry Regulatory Authority ejected from its ranks Halcyon Cabot Partners, its CEO and chief compliance officer, alleging the New York-based brokerage and investment services firm ran a kickback scheme involving private placement fees, among other securities violations.
FINRA charged the firm, along with CEO Michael Morris, CCO Ronald Heineman and previously barred registered representative Craig Josephberg, with a litany of violations in a compliant filed in August, including securities fraud, sales practice abuses, and inadequate supervisory and anti-money laundering policies.
According to the regulator’s investigation, the firm’s executives covered up discounts incorporated into private placements of stock they arranged in 2012 for cancer drug development company Cell Therapeutics Inc. The scheme allowed Cell Therapeutics to hide the fact that it was selling its shares at a discount, while Halcyon collected fees for doing very little work.
"This sham placement arrangement allowed the investor to conceal the kickback of the placement fee and thus deceive the market into believing that the shares were being sold at the full offering price,” Brad Bennett, FINRA's executive vice president and chief of enforcement, said in a statement Wednesday.
In addition to the fraudulent kickback scheme, FINRA also uncovered that Halcyon enabled a now-expelled broker-dealer, Felix Investments, to collect undisclosed commissions. Under the terms of an agreement between the two firms, Felix charged buyer commissions and Halcyon charged seller commissions on certain transactions, even when Halcyon did not provide any services to the sellers. The two firms then secretly shared the sellers’ commissions, according to FINRA.
The schemes were possible because CEO Morris falsified Halcyon's books and records, concealing his employee Josephberg’s illegal securities sales in states where he was not registered. FINRA found the firm also failed to supervise Josephberg, who allegedly participated in churning and unauthorized trades.
“These actions were consistent with the culture of non-compliance fostered by Halcyon and its principals, which manifested itself in widespread sales practice abuses and AML violations that are also detailed in this case," Bennett added.
Halcyon Cabot Partners, Morris and Heineman agreed to settle with FINRA, but neither admitted nor denied the charges.