FINRA Charges Glendale Securities With Securities Fraud
Glendale Securities, Inc., a brokerage firm headquartered in Sherman Oaks, California, as well as George Alberto Castillo, the firm’s president and primary trader, have been charged by Financial Industry Regulatory Authority (FINRA) in a Complaint alleging that the firm and Castillo, among others, engaged in a fraudulent stock trading scheme. Department of Enforcement v. Glendale Securities, Inc., et al, No. 2016049565901 (Oct. 5, 2017).
According to the Complaint, Glendale Securities’ operations principally revolved around helping customers with depositing and ultimately liquidating penny stocks and microcap securities, and the firm acted as a market maker for certain low-priced securities. The Complaint alleged that between October of 2014 and March of 2016, the firm and Castillo concocted a manipulative scheme to defraud investors involving one of the thinly traded and low-priced stocks: Nugene International Inc. (NUGN).
The Complaint stated that NuGene International Inc., a company with $68,620.00 in assets as of September of 2014, was created to develop and market skin products. On December 26, 2014, NuGene reportedly agreed to merge with Bling Marketing Inc., a wholesale jewelry enterprise with $22,275.00 in assets as of September of 2014. The Complaint stated that NuGene remained as the surviving company in the form of a subsidiary wholly owned by Bling, and shares were traded under symbol BLMK until February 3, 2015, at which point the ticker symbol NUGN was utilized. By way of the merger, thirty of the firm’s shareholders reportedly sold eleven million shares to thirty-eight individuals, creating seven million shares subject of trading restrictions in accordance with a lock-up agreement.
Apparently, the lock-up agreements restricted shares from being sold in the first seventy-five days of ownership, where after that period, up to twenty-percent of the shares owned within a thirty-day period could be sold. Yet, an escape clause in the agreement cancelled the restrictions so long as the closing price of NUGN achieved a $200,000,000.00 market capitalization on three consecutive trading days.
The Complaint alleged that in light of those restrictions, orders were placed by Castillo or the firm on a customer’s behalf to manipulate NUGN’s closing prices, artificially inflating the price of NUGN as a result. FINRA alleged that Castillo’s and the firm’s actions led customers to be released from the lock-up agreements. The customers whose investments were cleared from the lock up agreement then liquidated the artificially inflated shares of NUGN for at least $8,000,000.00, leading the firm to accumulate commissions totaling $190,000.00 in addition to fees for liquidating the positions. Consequently, FINRA Department of Enforcement alleged that the firm and Castillo willfully violated Securities and Exchange Act of 1934 Section 10(b), Securities and Exchange Commission (SEC) Rule 10b-5, in addition to FINRA Rules 2010 and 2020.
The Complaint further alleged that the firm, Castillo, and Paul Eric Flesche, the firm’s chief compliance officer, failed to create and implement supervision systems and procedures meant for ensuring that securities were lawfully sold to customers. According to the Complaint, 482,377 shares of restricted securities had been sold despite the securities never having been registered nor provided an exemption from registration. Consequently, the firm was alleged by FINRA Department of Enforcement to have failed to comply with Securities Act of 1933 Section 5, and failed to supervise in that regard; conduct violative of FINRA Rules 2010, 3110(a) and 3110(b).
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