Alpine Securities, a brokerage fighting expulsion from FINRA and pursuing legal cases against its last two CEOs, has a new skirmish: A separate SEC matter it says should concern the whole industry.
Salt Lake City-based Alpine Securities has gotten mixed results in its lengthy and repeated run-ins with regulators. One affiliate under common ownership prevailed last year over FINRA when the SEC overturned a previous enforcement case. However, the brokerage also coughed up a civil penalty of $12 million because of a federal court's decision in another SEC case accusing the firm of anti-money laundering failures. And a different judge quickly tossed Alpine's lawsuit against FINRA last year alleging that hearings on Zoom violated its rights.
Its current SEC and FINRA cases revolve around the company's conduct as a brokerage that clears trades of stock in smaller companies, which are known in the industry as "small cap," "microcap" or "emerging" securities. The regulators allege Alpine charged exorbitant monthly fees of $5,000 per client and made $54 million worth of unauthorized trades. The attorney representing the firm says the regulators simply have a "distaste for trading in the microcap markets" that is resulting in a barrage of litigation against Alpine.
"Alpine was one of the very few firms that was willing to execute these microcap trades. What we were doing was trying to figure out how to continue to operate in a dramatically different regulatory environment," said attorney Maranda Fritz, referring to deposit requirements that forced the company to hold more cash in the bank for every transaction and, Alpine says, made it impossible to work with retail clients.
"It makes absolutely no sense that the SEC thinks it's a good use of time," she said. "We don't have double jeopardy rights in this regulatory context."
Alpine has more than $10 million in net capital on its balance sheet, according to its latest SEC disclosure. An unaudited statement from the end of March said it had $1.5 million, plus several millions more in an escrow account in case it must pay the restitution in the FINRA decision that Alpine is appealing. Last September, the SEC vacated a prior FINRA case that began in 2015 and would have barred Alpine owner John Hurry from the industry. Instead, an SEC administrative panel ruled that FINRA's National Adjudicatory Council had "incorrectly applied the legal standards" in the case.
Alpine's argument that the microcap brokerage business is becoming prohibitively expensive carries at least a kernel of truth among industry experts like longtime recruiter Jon Henschen of Henschen & Associates.
Anything that's as "high-risk" as microcap stocks is "swimming against the current" of recent enforcement cases, Henschen said. He notes that there are "a lot of flaky firms out of Utah that have come and gone," but Alpine displayed a significant amount of net capital in the filing last year. It's facing an uphill climb in its quest to defeat the regulators, though.
"FINRA will always outspend them in litigation," Henschen said. "It's hard to swim against the wave of lawyers that can go after you."
The SEC and FINRA are taking on Alpine in two different cases, with Alpine appealing its March expulsion by a FINRA administrative panel that ordered it to pay $2.3 million in restitution over "unreasonable" fees. FINRA first lodged the case three years ago. The decision earlier in the year mentioned some of the same allegations as the SEC's case, though it largely took Alpine to task for the fees it says were "unfair" and "applied in a discriminatory manner."
Alpine's handling of the shutdown of retail client accounts in May and June 2019 has come under scrutiny in the SEC case, which the regulator filed on Aug. 10 in Las Vegas federal court. The company sold $268,000 worth of securities out of accounts it deemed "worthless" due to rising net capital requirements and transferred tens of millions of dollars worth of holdings from 545 customer accounts it declared "abandoned" into its own control, according to investigators. Alpine didn't return the money until after several complaints and a FINRA probe, the SEC says.
The company contends it sent messages to the retail clients for nine months notifying them of the higher fees and outlining how to close their accounts. Fritz, Alpine's attorney, said the brokerage "reversed the transactions immediately" after the $54 million moved into accounts it controlled. In an Aug. 9 filing that's part of its appeal of the FINRA decision, Alpine blamed ex-CEO Chris Doubek for taking actions that were "neither directed by or known to ownership."
The panel's March decision had "erroneous factual assertions piled on top of unsupported legal assumptions," the filing states. "And those errors are then magnified by the severe and unprecedented penalty imposed on Alpine."
Efforts to contact Doubek, who's charged in the SEC case this month alongside current Alpine Chief Operations Officer Joseph Walsh, were unsuccessful.
Alpine has filed civil cases and arbitration claims seeking the return of $1.3 million it says Doubek and an accomplice misappropriated from the firm, according to its financial disclosure. A jury in the federal court of Tampa, Florida, awarded it $932,000 in damages based on claims of unjust enrichment against the CEO prior to Doubek, Chris Frankel, the document states. Frankel has denied those allegations and is challenging the decision on procedural grounds.
Financial advisors should know about Alpine's saga, in case they get caught in a similar bind with regulators, Fritz said.
"The SEC is absolutely duplicating a FINRA case that we have litigated for so many years," she said. "They're doing everything they can to essentially shut down the microcap markets, and much that is happening to Alpine is as a result of that."
