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FOG Equities Fined $60k, Brokers David Spack & Scott Epstein Fined and Suspended for AML, Due Diligence Failures in Penny Stock Transactions

FINRA censured and fined FOG Equities, LLC $60,000, and fined & suspended former FOG AML & Chief Compliance Officers David S. Spack of the firm's San Francisco, CA branch and Scott Noel Epstein of Chicago, IL for several structural and system failures through 2015, including failure to establish, implement and maintain adequate supervisory systems, anti-money laundering (AML) and written supervisory procedures, and an associated failure to detect and investigate several "red flags" indicative of potentially suspicious or detrimental account activity at FOG Equities, including approving transactions that violated firm policy.

FINRA AWC #2015043495101

The findings state penny stock investment firm FOG—whose business includes providing execution services for US-based brokerages—started trading large volumes of the low-priced securities and executed over 640 penny stock transactions, the majority of which were large liquidations of penny stock shares generating sale proceeds of over $24 million and commissions in excess of $260,000.

FINRA claimed that the firm, Spack, and Epstein "failed to conduct any due diligence prior to the sale of penny stock shares," and accordingly made no determination as to whether the penny stocks traded were registered and free from restriction, which purportedly caused FOG's penny stock liquidations to occur "without any review for compliance" with the Securities Act.

The report notes that FOG Equities has been the subject of multiple FINRA inquiries, including a FINRA Office of Fraud Detection and Market Intelligence review of 13 million shares of eight penny stocks that FOG liquidated, generating proceeds in excess of $3.3 million. During this time, FOG's clearing firm allegedly contacted FOG "expressing concern" based on potential AML red flags.

In response, Spack allegedly designed new policies and procedures for low-priced securities trading, which was approved by Epstein. However, FINRA reviewed the new policy and procedures and determined them to be "inadequate," and noting that even though those procedures were on the books, firm brokers "often deviated from [them] without sufficient explanation." For instance, FINRA found that even though he had approved the new policies, Epstein subsequently approved transactions as "exception to the Firm's policy," including one in which an officer of the company FOG planned to trade had previously been involved in penny stock fraud.

Accordingly, FINRA charged FOG Equities, Spack, and Epstein with failing to establish, implement and maintain adequate supervisory and AML procedures, finding that the firm's programs were not reasonably designed to monitor for, detect, and cause the reporting of suspicious activities at the firm, even though both FINRA and FOG's clearing firm had raised questions about several instances of suspicious activity and red flags.

If you have invested with FOG Equities, a firm that uses FOG for its execution services, or with San Francisco's David S. Spack (CRD #5788566) or Chicago's Scott Noel Epstein (CRD #4550908), in penny stocks or other low-priced securities and the firm or broker's failure to provide adequate due diligence and supervision has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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