FINRA Settles Allegations that Noble Financial Capital Markets and Nicolaas Petrus Pronk, Respondents recommended and sold AdCare Health Systems, Inc. shares to seven customers without disclosing conflicts
In response to the filing of a Complaint on November 23, 2016, by the Department of Enforcement of the Financial Industry Regulatory Authority ("FINRA"), Respondents Noble Financial Capital Markets and Nicolaas Petrus Pronk submitted an Offer of Settlement dated October 15, 2017, which the regulator accepted. Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondents Noble Financial Capital Markets and Nicolaas Petrus Pronk consented to the entry of findings and violations and to the imposition of the sanctions. FINRA Department of Enforcement, Complainant, vs Noble Financial Capital Markets and Nicolaas Petrus Pronk, Respondents (Order Accepting Offer of Settlement, FINRA Office of Hearing Officers, 2013035740901, October 18, 2017) (the "Order").
As set forth, in part, in the "Summary" portion of the Order:
1. From April 2011 through September 2011 (the "Relevant Period), Respondents Noble and Noble's President, Pronk, recommended and sold nearly a million shares of AdCare Health Systems, Inc. ("AdCare") common stock (ticker symbol: ADK) to seven customers without disclosing Noble's multiple and material conflicts of interest.
2. Respondents promoted and recommended ADK to prospective investors to profit from Noble's undisclosed investment banking relationships with AdCare and their undisclosed arbitrage of AdCare securities, which created a financial incentive for Respondents to recommend ADK to customers. Pronk retained ultimate control over all Firm activities including proprietary trading, sales, investment banking, and the decision to initiate and prioritize the promotion and sale of ADK.
3. To boost the sale of ADK, Respondents aggressively promoted and solicited purchases of ADK by: issuing research through Noble's Research Department, conducting nondeal road shows through Noble's Investment Banking and Institutional Sales Departments, and contacting prospective investors, primarily institutions, through registered representatives in Noble's Institutional Sales Departments (Brokers").
4. Respondents also provided the Brokers with a misleading sales script to use when soliciting prospective investors in ADK.
5. While selling ADK, Respondents failed to inform the seven customers who purchased ADK about four material conflicts of interest:
a. First, that AdCare paid Noble $6,000 a month to provide advisory services to AdCare, pursuant to an Advisory Agreement entered into with AdCare in February 2011 ("Advisory Agreement");
b. Second, that Noble agreed to raise capital for AdCare in return for a seven percent cash fee on the total gross proceeds generated from the exercise of both publicly- traded and privately-held AdCare warrants pursuant to an addendum to the Advisory Agreement executed in April 2011 (`Warrant Agreement");
c. Third, that Noble promised the Brokers extraordinary incentive compensation, in addition to the normal commissions, to promote and solicit sales of ADK; and,
d. Finally, that Respondents were engaged in a speculative arbitrage trading strategy in ADK and publicly-traded AdCare warrants (ticker symbol: "ADK.WS").
6. In connection with the arbitrage, Respondents, through Noble's proprietary accounts, purchased and held ADK.WSand sold short ADK to its customers. Later, Noble exercised the warrants it held long and, using the common shares it received through the exercises, covered its short position in ADK.
7. Respondents engaged in the arbitrage to profit from the spread between the cost of buying and exercising ADK.WSand the proceeds generated by short-selling ADK, and to generate Noble's seven percent fee under the Warrant Agreement.
According to the evidence presented at trial, Cortese and his business partner, Priscilla Ann Ellis, as well as Ellis's daughter, Kenietta Rayshawn Johnson, were members of an international criminal organization that defrauded dozens of victims across the United States and then laundered the funds. Much of the money was sent overseas. Many victims were law firms that had been solicited online to perform legal work, provided counterfeit cashier's checks for deposit into the firms' trust accounts, and then directed to wire money to third-party shell businesses controlled by the conspirators. Others victims included title companies defrauded in phony real estate transactions or individuals targeted by fake suitors on dating websites. The conspiracy also employed hackers who compromised both individual and corporate email accounts, ordering wire transfers from brokerage and business accounts to shell accounts controlled by conspirators.As part of the scheme, victims were instructed to wire money into funnel accounts held by conspirators, known as "money mules." The funds were then then quickly moved to other accounts in the United States and around the world before the victims could discover the fraud. Bank records indicated that, from 2012 to 2015, several million dollars' worth of wire transfers were received into the accounts to be laundered. Conspirators in Canada, Nigeria, South Korea, Senegal, and elsewhere helped coordinate the fraud from abroad.Cortese, a licensed attorney in Texas, worked for the conspirators by laundering victims' money through his interest on lawyers trust accounts ("IOLTAs"). He also met with individuals in person to retrieve cash withdrawn from receiver accounts and recruited his paralegal and others to open such accounts to launder funds. Ellis laundered several million dollars' worth of fraud proceeds through several bank accounts under her control. She also arranged for the creation of high-quality forgeries of checks and other documents. Johnson, then a bank employee at Capital One, helped create the counterfeit checks and monitor money flows between the conspirators' accounts.For her role in the conspiracy, Ellis was sentenced to 40 years in prison. As part of her sentence, the Court entered a money judgment against her in the amount of $9,288,241.36 and the forfeiture of various assets. In addition, she was ordered to pay $3,767,196 in restitution to her victims.