A struggling clearing firm and brokerage whose affiliate prevailed in a legal dispute with FINRA last year intends to fight the regulator again after a panel ordered its expulsion from the industry.
Under a March 22
“Alpine Securities converted more than 2,000 customers’ positions based on the false assertion that they were worthless or abandoned, charged excessive and unfair fees and commissions, executed unauthorized transactions and withdrew profits without authorization,” according to the ruling.
“Individually, the violations in this case are amongst the most egregious in the securities industry,” the ruling continued. “Several violation-specific aggravating factors exist, such as that the firm acted in bad faith and intentionally, and not with a genuine misunderstanding as to the customers’ authorization. Additionally, the unauthorized transactions occurred in furtherance of other violations, such as conversion and unfair pricing and involved large numbers of customers and large sums of money, all aggravating factors for unauthorized trading.”
Scottsdale Capital Advisors — Alpine’s affiliate under the common ownership of John and Justine Hurry and their holding company SCA Clearing — won an SEC
Alpine is “very troubled” by the latest FINRA decision, which it views as “a severely skewed description of the events at Alpine,” according to Maranda Fritz, the attorney representing Alpine. FINRA has displayed an “insistence that it can micromanage the business of Alpine, including its fees and even its direct discussions and agreements with certain customers,” she said in an email. The firm will continue to operate and appeal the decision, Fritz said.
“Over the last few years, the regulators have made it increasingly difficult for firms to operate in the microcap space, causing regulatory and transactional costs to increase exponentially,” she said. “When Alpine reacted to that by seeking to revise its business and recalibrate fees to reflect the enormous costs and the risk of continuing to conduct microcap transactions, FINRA then used its rules concerning ‘reasonable’ fees to claim that Alpine’s higher fees, which did not even begin to cover those increased regulatory and transactional costs imposed by regulators, were improper.”
The “continuation of its determined efforts to constrict and even prevent trading in the microcap markets” should be of concern to “anyone who appreciates the need for financing transactions for startup and emerging growth companies,” Fritz added.
Other key lessons emanating from the case stem from the internal arguments within the firm in recent years, said Bill Singer, an attorney and former regulator who writes the “
“You keep your friends close and your enemies closer. This is a classic example of what happens when personal issues get involved in running a business,” Singer said. “It seems like all FINRA had to do was put out some danishes and coffee and a tape recorder, and they got everything they needed.”
FINRA’s allegations revolve around the firm's actions starting in 2018, when Alpine’s net capital requirement jumped from $250,000 to $1 million. Alpine began losing business from “ex-clearing” clients that had previously enabled the company to clear and settle penny stock trades without using its own capital to reach the mandatory deposit level, FINRA says.
Alpine was once one of the largest clearing firms in the country, and it had reported net income of $8.63 million for the 13 months between the beginning of March 2017 to the end of March 2018, investigators say. By the second and third quarters of 2018, the business was losing tens of thousands of dollars, according to FINRA. Another SEC case decided the following year ordered the firm to pay a $12-million fine over its suspicious activity reports. The firm was also paying rent to an affiliated entity and took out a line of credit from another affiliate, FINRA says.
Under a revision to its fee schedule and underlying structure, the company gave up its retail business by moving any active accounts to Scottsdale Capital and boosted its $100 annual account fee in August 2018 to a new charge of $5,000 per month, according to FINRA.
The hike amounted to “an astounding increase of approximately 60,000%,” the regulator
“Alpine Securities argues that [FINRA] Enforcement has not demonstrated other instances in which a firm has been expelled under similar circumstances and states that it is therefore not appropriate to expel the firm,” according to the decision. “We do not agree.”
The company’s affiliate succeeded in offloading one compliance case last year in a rare SEC decision overturning a FINRA case. Even after a panel approved the disciplinary action against Scottsdale Capital in 2016 and an appeal before the regulator’s National Adjudicatory Council failed two years later, the SEC “forcefully vindicated” the firm with a finding that FINRA had “improperly and unfairly changed its theory of liability” in the case involving sales of unregistered securities and supervision,
“The decision marks a significant victory for the respondents and illustrates the importance of the SEC's oversight of self-regulatory organizations like FINRA,” the law firm, Norton Rose Fulbright, wrote about the case.
Among some other currently pending cases at Alpine, the company is seeking to recover damages from a former officer the firm has accused of misappropriating about $1.3 million,
