On March 26, 2015, the SEC settled charges against 22 parties relating to arrangements by which companies not registered as broker-dealers purchased securities on behalf of Global Fixed Income, LLC (GFI) and received transaction-based compensation. The settlement generally requires each of the participants to pay disgorgements of profits and civil monetary penalties.
According to the SEC’s press release announcing the settlement, “Global Fixed Income essentially hired firms to act as brokers on its behalf and purchase billions of dollars of newly issued bonds to increase profitability in the bond market, yet none of the firms or their employees were registered to legally act as brokers.”
GFI, owned solely by Charles Perlitz Kempf, regularly purchased new issues of corporate bonds. Because the new issues were often subject to limitations on the amount of the issue that could be allocated to each purchaser, GFI sought to increase its allocation by enlisting third parties to act as straw purchasers (the “purchasers”). GFI would transfer funds to accounts controlled by the purchasers, and the purchasers would purchase allocations of the new issues in their own names but on behalf of GFI and then transfer the securities to GFI. In turn GFI would sell the securities into the secondary market at a profit, and the profits would be split between GFI and the purchasers. All of these arrangements were set forth in written agreements between GFI in the purchasers. In some cases, the agreements even included representations by GFI that the purchaser was not required to register as a broker-dealer as a result of the arrangement.
The purchasers were not registered broker-dealers, although several of the purchasers were registered representatives of broker-dealers (the SEC found the GFI arrangements to be outside the scope of their duties as registered representatives). The SEC charged that these arrangement clearly amounted to effecting transactions in securities in exchange for transaction-based compensation in violation of Section 15 of the Securities Exchange Act.
Over a three year period, $4.8 billion in securities were purchased on behalf of GFI in approximately 2,500 trades by the purchasers, and the purchasers were paid an aggregate of $9.7 million in transaction-based compensation as a result. For their troubles, the parties must collectively pay $5 million in disgorgement of profits ($2.4 million of which must be paid by GFI and Kempf) and $1 million in civil penalties ($500,000 by GFI, $50,000 by each other entity, and $5,000 by each individual). In addition, Kempf has been banned from associating with a registered entity and being involved in a penny stock offering for a period of one year.