INVESTOR DEFENSE LAW BLOG

SPECIAL REPORT: Wilson-Davis & Co. Fined for Improper Penny Stock Trades

Posted on Jul 4th, 2017 to Conflict of Interest, Penny Stocks, Poor Supervision, Wilson-Davis & Co.

Wilson-Davis is in trouble again with the Financial Industry Regulatory Authority (FINRA). According to FINRA, Wilson-Davis, which is based in Salt Lake City but also has operations in California and other states, was recently “front running” penny stock trades. This should be a significant concern for Wilson-Davis clients.

What is front running?

Front running can occur when a brokerage firm like Wilson-Davis trades for itself as well as its customers. Let’s say Wilson-Davis wants to buy 100 shares of IBM, but one of its clients also wants to buy 100 shares of IBM, and that there are 100 shares available at $20.00 and another 100 shares available at $20.01. Who gets the cheaper shares? According to FINRA rules, a brokerage firm is not allowed to buy the cheaper shares for themselves, leaving their clients paying the higher price. Doing so—executing the investment firm’s own orders at better prices, then filling customer orders later—is called front running.

When can front running really harm investors?

For large, publicly traded securities like IBM, front running (while still improper) doesn’t really hurt individual investors. Paying an extra penny per share in our example above might not make a noticeable dent in an investors’ portfolio, because there are so many buyers and sellers at any given time that everyone pays close to the same price.

This is not true for investments that are illiquid, meaning there are only a few buyers and sellers willing to trade at any given time. This is usually the case for penny stocks (also called over the counter (OTC) securities or the “pink sheets”), which are usually tiny, speculative startup companies.  In the penny stock market, there could be big differences between sell orders. By front running in penny stocks, an investment firm might be able to lock in large profits that would have otherwise gone to the firm’s investors.

According to FINRA, Wilson-Davis engaged in front running at least thirty-five times in a variety of OTC securities, including:

Generation Next Franchise Brands (VEND); Richfield Oil and Gas (ROIL); Cantech Holdings (BSSP); Cocrystal Pharma (COCP); Windstream Technology (WSTI); Vystar (VYST); DNA Print Genomics (DNAP); Accurexa (ACXA); Flux Power Holdings (FLUX); Greengro Technologies (GRNH); Quest Solution (QUES); Blue Water Ventures (BWVI); Exeled Holdings (ELED); and Joey New York (JOEY)

Investors may have gotten worse deals on their trades in these and other penny stocks due to Wilson-Davis front running

What are some of the other dangers of penny stocks?

Penny stocks are the “wild west” of the stock market world. While these stocks are publicly traded, they are not listed on any exchange. Stocks that are listed on an exchange generally have better accounting and auditing procedures and have been in business for a while, so investors can have more confidence in their numbers and can evaluate an investment based on its track record. In contrast, penny stocks are usually for brand new companies, with financial figures that might be dubious, and without any track record.

Just as the wild west has outlaws, the world of penny stocks has its own ruffians, who will run investment schemes like the classic “pump and dump” to bilk uninformed investors hoping to strike it rich. Here’s how a classic pump and dump scheme works: 1) some con artists found a company and issue themselves a gazillion shares of stock in a company that is basically a worthless corporate shell; 2) a stock promoter with a newsletter will then tout the company as a great investment (the “pump”); 3) as new investors buy shares, the company’s founders sell their holdings at grossly inflated prices (the “dump”); 4) when the marketing buzz stops the shares tank. The company founders walk away wealthy, and the investing public is left holding a bunch of worthless shares.

In fact, Wilson-Davis was fined for its (allegedly unwitting) participation in one of these pump and dump schemes in 2010. According to FINRA, Wilson-Davis allowed some of its customers to bring millions of shares in Ever-Glory International into their Wilson-Davis accounts to sell to unwitting investors in this garbage company, then earned commissions on trades that were likely prompted by little more than a paid stock promoter in Canada. According to FINRA, Wilson-Davis should have realized it was participating in a penny stock scam because, among other things: 1) Ever-Glory was a little known development stage company; 2) the company had just gone through a reverse merger, forward stock split, and name change; 3) the shares were not registered with the U.S. Securities & Exchange Commission (SEC); the shares had very low trading volume prior to the stock promotion; and 4) multiple accounts at Wilson-Davis were all connected to the same stock promoter. Wilson-Davis made money by charging commissions for sales that were part of this scam, while ordinary investors paid the price.

What else is going on at Wilson-Davis?

In addition to being fined by FINRA for front running and participating in a penny stock scam, Wilson-Davis has at least forty-seven other disclosures on their BrokerCheck report, a report available to the public through FINRA. Among other lapses, Wilson-Davis was fined for failure to adequately disclose profits made from “riskless principal” transactions, transactions where the brokerage fills a buy order from one customer with a sell order from another one of its customers. Profits on these types of trades should be low, because the brokerage firm isn’t taking any risk and, if the orders really match, filling them is very easy, but apparently Wilson-Davis failed to adequately disclose that some of its trades were riskless principal transactions. While this blog is not long enough to go into the other 40+ violations of securities regulations, it could pay off for clients of Wilson-Davis to monitor their accounts closely.

If you have questions about investment losses, the securities litigation attorneys at Investor Defense Law LLP may be able to help, and offer free consultations. Investor Defense Law LLP is a law firm dedicated to helping investors in California, Georgia, and Washington State recover investment losses. We understand investment fraud and know how to sue investment advisors, brokerage firms, and financial advisors. To learn more, contact an investment fraud attorney at 800.487.4660.


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