The SEC charged a former registered representative with Exchange Act violations in connection with allegations that he gave certain customers preferential access to initial public offerings ("IPOs") and secondary offerings in exchange for cash kickbacks.
In its Complaint, the SEC alleged that Brian Hirsch, while working as a member of the wealth syndicate desks at two broker-dealer firms, determined the offering allocations for certain groups of retail customers. Mr. Hirsch allegedly entered into arrangements with two customers granting them preferred access to public stock offerings in exchange for a percentage of the customers' profits from secondary market trading in the relevant stocks. This practice, the SEC found, violated both securities laws and the firms' policies regarding the allocation of securities offerings. The firms expressly prohibited allocations based on quid pro quo arrangements. The SEC alleged that Mr. Hirsch received approximately $1 million in illicit kickbacks through his fraudulent allocation scheme.
The SEC also charged one of Mr. Hirsch's customers, Joseph Spera, in connection with his role in the kickback scheme. The SEC contends that Mr. Spera made approximately $4 million in profits through his arrangement with Mr. Hirsch.
As a result of the alleged misconduct, the SEC charged both defendants with violating Exchange Act Section 10(b) and Rule 10b-5. Mr. Hirsch was further charged with aiding and abetting Mr. Spera and the second customer's violations. The SEC is seeking relief in the form of civil monetary penalties, disgorgement and interest. The U.S. Attorney's Office for the District of New Jersey also charged Mr. Hirsch in a parallel criminal action.
Commentary / Steven Lofchie
Firms should consider if there are procedures that can be used to prevent such activity. At a minimum, given the warning that this case provides, firms should consider on what basis decisions as to IPO allocations are made.
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