Two subsidiaries of E*Trade Financial Corporation—E*Trade Securities, LLC and G1 Execution Service, LLC—were sanctioned by the Securities and Exchange Commission for permitting three unnamed customers to sell to the public newly issued penny stocks that previously had been deposited in their E*Trade accounts. The customers made their sales without any registration statements for the securities being in effect. (Distributions of securities without registration statements or a valid exemption being in effect are unlawful.) According to the SEC, at various times between March 2007 and April 2011, the E*Trade companies failed to conduct appropriate due diligence to identify a lawful exemption that might be in place, and as a result facilitated the unlawful sale of penny stocks of approximately 247 different companies. Moreover, the E*Trade companies are alleged to have missed several red flags which the SEC claims should have “raised a question as to whether these customers were engaged in an unlawful distribution.” These red flags included that “(1) the three customers acquired substantial amounts of newly issued penny stocks; (2) directly from little known, non-reporting issuers; (3) through private, unregistered transactions; (4) then immediately resold those shares; and (5) wired out the sales proceeds.” The E*Trade companies agreed to settle this matter by remitting an aggregate penalty of US $1 million and paying back more than US $1.5 million in disgorgement and interest from the impermissible sales. (G1 Execution Services was sold earlier in 2014 to a third party.) Concurrently with issuance of this settlement, the SEC published a Risk Alert and Frequently Asked Questions related to obligations of broker-dealers in connection with unregistered transactions for their customers. (Click here for more information on this Risk Alert and FAQs in the article “SEC Issues Risk Alert and FAQs on Customer Sales of Unregistered Securities” in the October 10 edition of Corporate & Financial Weekly Digest by Katten Muchin Rosenman LLP.)