by Gary Carleton, Carleton Law PLLC
Welcome to finraFlashback! Live and Learn. Anyone who had a difficult experience and been forced to live through challenging times because of it, knows the value of learning from one’s mistakes. Everyone makes mistakes. The smart people learn from their mistakes.
For more than 30 years, I worked for securities regulators – the SEC and then FINRA. I investigated and prosecuted securities brokerage firms and their brokers for everything from insider trading to stock market manipulation, to straight out stealing from little old ladies. There are lessons learned all along the way. At least I hope they learned their lessons. Even if they didn’t, my hope is that by telling these FINRA Flashbacks of prior experiences, you will have a chance to learn from their mistakes.
FLASHBACK 2: FINRA’s Investigation of a Single Customer Complaint Uncovers Major Stock Manipulation and Expels the Firm.
A Lesson for Firms – Keep Small Problems Small
It is critical that firms learn to manage small problems so they do not blossom into full grown calamities. As Kenny Rogers would sing – Know when to hold ‘em. Know when to fold ‘em. Know when to walk away and know when to run. The same holds true when a firm knows it has vulnerabilities even before it is visited by a regulator.
Being transparent with your counsel is also essential when facing regulatory scrutiny to give the best chances that small problems stay small. In this week’s case analysis, it is not known whether the firm, Kirlin Securities and its principals were transparent with counsel, but it demonstrates how FINRA can pull on what seems like a mere loose thread until it unravels the entire garment.
The case was investigated and brought by FINRA Enforcement against Kirlin Securities Inc. (“Kirlin”) in 2005. (NASD Discip. No. EAF040030001) It began as one of the simplest cases that FINRA Enforcement handles, a single customer complaint that he did not get the right price when he sold a single security in a single transaction. This established Kirlin customer complained about the price he received to Kirlin, the brokerage firm where he had his account and who executed the principal transaction. In compliance world this is known as “best execution.”
At the time, Kirlin was a relatively small firm with its principal offices on Long Island in New York. Kirlin was wholly-owned and was the main asset of Kirlin Holdings, a publicly held, thinly traded company on Nasdaq National Market. The two executives of the firm, Anthony Kirincic and David Lindner (who combined their names to form the company “Kir + “Lin” to form “Kirlin”) each owned about 20 percent of the outstanding common stock (stock symbol KILN).
The tiny thread of a customer complaining of not getting a fair price on his transaction began to unravel just as soon as Kirlin decided to refuse to voluntarily pay the customer’s claim. As a result, the matter was brought to FINRA’s (then NASD) attention. The amount of money in dispute as a result of that single KILN transaction was less than $30,000.
Once FINRA got the case, it began to pick at the threads – reviewing pricing not only on the day of the transaction but for a period before and after the trade. FINRA was at first attempting to determine whether the pricing of the transaction was fair based on an analysis of other trades in the marketplace at or around the same time as the customer’s transaction.
Interesting trends began to emerge. As it turns out, the stock was KILN, the common stock for Kirlin Holdings and Kirlin executed the trade in a “principal” capacity meaning, the firm was on the buy side of the trade. Yes, the stock was of the parent company of the broker where he was affecting the transaction from his Kirlin brokerage account.
FINRA continued to pull at threads, finding, that Kirlin, though not a market maker in its stock, nevertheless participated as a buyer or seller in approximately 90 percent of the KILN market transactions for a period in March and April. FINRA identified the retail customers behind the trades during that period and learned that a significant amount of the volume and number of trades were being affected on behalf of relatives of Kirincic, the co-president of the firm. And it was the firm president who was placing the specific orders with Kirlin’s trader on behalf of his family members.
What’s more, FINRA observed that from late March through early April, the price of KILN increased steadily and held at just over $1.00 per share for a few weeks before once again declining to well under $1.00. All of this activity was taking place with no news from the issuer to explain the price movement.
It did not take long to find the motivation. As it turns out, the Nasdaq National Market had provided Kirlin Holdings with notice of its intention to delist KILN because it had been trading below the market’s minimum listing standard of $1.00 per share. Nasdaq informed Kirlin that to continue to list KILN on the more prestigious National Market, the stock would need to trade at or over $1.00 per share for ten consecutive trading days and with a minimum trading volume.
Kirincic, with the assistance of Kirlin’s Head Trader, used accounts of his own parents and sister to enter purchase orders at progressively higher prices, often replacing unfilled orders after just a brief time, with other orders at even higher prices, claiming he needed to raise the price to get the order filled. The purchases by his own relatives would turn out to represent the most significant amount of the overall volume in the stock.
To affect all of these purchases on behalf of his family, Kirincic would need to move funds around so the family accounts could pay for it all. As part of the scheme, Kirincic was also found to have forged documents belonging to his parents as a way to effect trades and move assets to his sister’s account, who took over as the major purchaser of stock during the scheme.
A review of trading in the sister’s account would reveal that the trading in Kirlin was well outside the normal trading that took place in the account.
Eventually, all of the trading and effort by Kirincic and his Head Trader appeared to be paying off as the price rose to just more than $1.00 per share. Once they breached that wall, the scheme changed to ensure that the stock maintained a price over $1.00 for the required period.
They accomplished this by entering buy orders just sufficient to absorb any selling activity that could push the price down. They would make sure that buy orders at more than $1.00 per share remained in effect to ensure that price closed above $1.00 per share each day.
Their scheme to maintain the price was working like a charm up until the very last day that they needed to maintain the price in order to achieve Nasdaq’s price maintenance requirements. With just hours to go, a customer placed a sell order for 114,000 shares of KILN.
Even though Kirlin had been maintaining a sell order for more than 25,000 shares at more than $1.00 per share to absorb sell volume and yet not allow the closing price to fall below $1.00, Kirlin clearly did not anticipate such a large sell order from customer DL. Kirincic also did not want to have his sister’s account spend more than $25,000 to fill the buy order and partially fill the sell order.
Instead, with customer DL’s sell order pending, Kirlin first withdrew his sister’s buy order for more than 25,000 shares at more than $1.00 (so he would not have to execute it), and then entered the sell order for customer DL at $.80 per share. The trader then reentered its standing buy order for more than $1.00 per share. Kirlin marked the customer sell of the 114,000 shares as a block order away from the market as a way to explain it away and not have an effect on the market price.
Yes, in a panic, Kirlin offered the customer only $.80 per share instead of the $1.05 it was trading (at a manipulate price) on the market. Although not happy with the price, the customer, who was facing extraordinary personal issues and was determined to get the trade executed without delay, reluctantly agreed to the sale, not knowing everything that Kirlin knew including the open purchase order from Kirincic’s sister.
Nasdaq ended up finding that Kirlin had once again met its listing standards and at least for a brief time, continued its listing of KILN on the Nasdaq National Market. Before too long after that, there was no ability to further prop up the company and it was delisted from Nasdaq National Market.
Based on its investigation of the trading, FINRA charged the firm’s co-President and Head Trader with manipulation of the Nasdaq market. The firm’s co-President also got charged with forging his parent’s signatures in an effort to further the manipulation.
After FINRAs proceedings, the panel found that Kirincic and the firm’s trader manipulated the market for KILN. Kirlin was expelled, and the co-President of the firm was barred. On appeal to the SEC, the Head Trader’s sanction was modified to an associational bar with a right to reapply after five years.
So, what started and could have ended by Kirlin simply paying the customer less than $30,000 to resolve the dispute, it ended by costing them the firm and Kirincic’s license. Oddly enough, even though the SEC affirmed that the respondents failed to provide “best execution” to the customer in the sale of his stock, it decided not to impose restitution to the customer based on the manipulated stock price of $1.05 per share.
Next Time – FINRA Brings Down a Penny Stock Firm Using an Informant
In Case You Missed It – You can find prior blogs on the FINRA investigative and disciplinary process at www.carletonlaw.net and go to the Blog tab.
The prior topics include:
* FINRA Flashback to Stratton Oakmont https://carletonlaw.net/finra-flashback-to-stratton-oakmont/
- Where Have all the FINRA Members (and disciplinary actions) gone? https://carletonlaw.net/where-have-all-the-finra-members-and-disciplinary-actions-gone/
- Special Considerations for Small Firms when Negotiating Settlements with FINRA https://carletonlaw.net/special-considerations-for-small-firms-when-negotiating-settlements-with-finra/
* Receiving that First Request for Information (a Rule 8210 Request)
https://carletonlaw.net/receiving-that-first-request-for-information-a-rule-8210-request/
* Pre-Wells Notices – An Early Opportunity to Discover FINRA’s Evidence and Present Your Case
* Understanding the Significance of FINRA’s Limited Jurisdiction https://carletonlaw.net/315-2/ and
* How Old is Too Old for a FINRA Disciplinary Action
https://carletonlaw.net/how-old-is-too-old-for-a-finra-disciplinary-action/
About Carleton Law PLLC
Getting a call from FINRA or SEC Enforcement telling you that your work as a securities broker is under investigation could be the worst day of your life. You have worked hard for years building your business. Now, with one wrongful allegation you can see it all swept away. But with expert counsel, it does not have to end that way.
For more than 30 years, Gary Carleton was the one conducting those investigations at FINRA and SEC and now his firm, Carleton Law PLLC, brings that savvy experience to bear to advocate for brokers and FINRA firms who find themselves in that dreaded position. Carleton Law focuses on the individual needs of each client to guide them through the maze of the investigative and disciplinary process.
Carleton Law PLLC | 1015 15th Street NW, Suite 1025 Washington, DC 20005 | info@carletonlaw.net
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Readers of this article should contact their attorney to obtain advice with respect to any particular legal matter. No reader should act or refrain from acting on the basis of information contained herein without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this article does not create an attorney-client relationship between the reader or user and the article author or law firm.
Attorney Advertising – Gary Carleton, Principal of Carleton Law, is admitted to practice law in the State of New York and the District of Columbia. This article may be considered attorney advertising.