SEC charges brokers over unregistered penny stock trades

The U.S. Securities and Exchange Commission (SEC) has charged a couple of brokers with setting up an unregistered side business to facilitate penny stock trading.

The SEC alleged that a couple of registered brokers, Jeffrey Galvani and Stuart Jeffery, created an outside business that operated as an unregistered introducing broker, enabling more than US$1.2 billion of securities trading, primarily in penny stocks.

The regulator’s complaint alleges that the firms provided an array of unregistered brokerage services, including “directing trades to executing brokers, facilitating trade settlements, and disbursing trading proceeds to customers.”

They allegedly used this model to trade more than 300 billion shares of stock in more than 400 issuers. And, the provision of these services generated at least US$12 million in transaction-based and other compensation, the SEC alleged.

The allegations have not been proven.

“Broker-dealer registration protects investors and our markets. It is not optional,” said David Peavler, director of the SEC’s Fort Worth, Tex. office in a release.

“As securities industry professionals, Galvani and Jeffery knew the rules, but we allege they didn’t follow them,” he added.

The SEC is seeking permanent injunctions, disgorgement, prejudgment interest, civil penalties, and penny stock bans against the brokers.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.