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FINRA fines Oppenheimer $1.4 million over penny stocks, internal controls

By Trevor Hunnicutt

NEW YORK (Reuters) - Oppenheimer & Co has agreed to pay $1.425 million in fines to resolve charges that the financial services company sold unregistered penny stocks and had inadequate safeguards against money laundering, Wall Street's industry-funded watchdog said.

Seven Oppenheimer brokers in the United States sold more than 1 billion shares of 20 unregistered penny stocks from 2008 to 2010, and the company failed to supervise activity in its customers' accounts, the Financial Industry Regulatory Authority (FINRA) said on Monday.

"If Oppenheimer had an adequate (anti-money laundering) and supervisory program in place, it would have made further inquiry into the penny stock sales," FINRA enforcement chief Brad Bennett said in a statement.

In consenting to the fine, Oppenheimer neither admitted nor denied FINRA's charges. The full-service broker-dealer, a subsidiary of Oppenheimer Holdings Inc, employs about 2,450 registered financial professionals in 115 branch offices.

In a statement, Oppenheimer said it was "happy" to resolve the charges.

"The sales of penny stocks at issue in the settlement with FINRA occurred a number of years ago and were mostly conducted by brokers no longer associated with our firm," Oppenheimer spokesman Brian Maddox said. "The firm has significantly tightened its policies relating to the sales of low priced shares and enhanced its review of client sales with respect to (anti-money laundering) oversight."

Penny stocks, so called because of their low prices and market capitalizations, usually trade outside major exchanges and are generally considered to be higher risk.

Amy Lynch, president of Rockville, Maryland-based consultancy FrontLine Compliance, said suspicious trading in unregistered securities can be hard to uncover because penny stocks change hands through paper certificates rather than electronically.

"Usually these are penny stocks of shell companies that don't exist or have no business, so it's a way of creating a shell game for illicit funds," Lynch said.

Several Oppenheimer customers had close ties to the companies whose stocks they held, FINRA's complaint noted. It cited one Oppenheimer customer in Boca Raton, Florida who owned nearly 40 percent of a tiny company's outstanding shares.

The over-the-counter or Pink Sheets company, called Bio-Clean International, which sells environmentally safe cleaning products according to its website, is not registered with the U.S. Securities and Exchange Commission.

Senior Oppenheimer compliance employees learned about the customer's large ownership stake and restricted his ability to purchase and receive the stock. But Oppenheimer's compliance director allowed the customer to continue selling stock already in his accounts, FINRA said.

Attempts to reach Bio-Clean through the contact information listed on its website were not immediately successful.

FINRA's complaint also said Oppenheimer's money laundering prevention protocols failed to monitor penny stock trading activity even in a case when it identified a foreign broker-dealer as a "high risk" customer.

Under the agreement with FINRA, Oppenheimer will hire an independent consultant to review the company's "policies, systems and procedures" relating to customer's accounts.

Oppenheimer was fined $2.8 million in 2005 for failing to establish and implement policies to detect and report transactions connected with the Bank Secrecy Act. New Hampshire also sanctioned the company last year for selling unregistered securities.

Shares of Oppenheimer fell 2.1 percent to $18.80 on the New York Stock Exchange in late-afternoon trading.

(Editing by John Wallace, Andrew Hay and Richard Chang)

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