By Patricia Uceda, Spring 2015 Graduate Research Assistant
Unregistered broker-dealers are very dangerous to investors, as they are commonly linked to fraud schemes and unsafe practices. This time is no different, as the SEC has recently charged a Chicago company with selling billions of shares of penny stocks without registering with the SEC as required by securities law.
International Capital Group (ICG) was a stock-based lender who allegedly sold stock obtained as collateral for at least 149 stock-based loans. They allegedly began selling the collateral shares three days before even closing and funding the loan, selling off the remaining shares within two weeks of receiving the stock. In many instances, ICG did not provide money to the customer until the stock had been sold in an amount sufficient to fund the loan itself. They performed all these activities without registering as a broker-dealer.
Broker-dealer registration is one of the core protections provided to investors by securities regulation. It enhances transparency in the financial industry through services such as BrokerCheck, which allow investors to view a broker-dealer’s history and if they have been involved in disputes before. By allegedly selling billions of shares of penny stock without registering, ICG subverted this core protection.
The SEC found ICG in violation of the Securities Act for failing to register. Without admitting or denying the allegations, the defendants agreed to cease and desist their activities. The SEC imposed disgorgement penalties and barred them from the securities industry for a number of years.