Initiated By
FINRA
Allegations
Norton was named a respondent in a FINRA complaint alleging that he and his member firm willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and violated FINRA Rule 2020 by manipulating the stock market. The complaint alleges that Norton and the firm manipulated the market for a low-priced, thinly traded, OTC microcap security issued by a company. The manipulative activity benefited numerous firm customers who collectively deposited and liquidated millions of shares of the company stock into the public markets at inflated prices. The manipulation began when Norton purchased 250 shares of the company stock at $5.00 per share into the firm's proprietary account. This purchase artificially set the closing price of the company stock at $5.00 per share and helped release millions of shares of the company stock held by Norton's customers from resale restrictions imposed on them by a Lock-Up/Leak-Out agreement between the customers and the issuer. Norton used his role as a company market maker to coordinate trading in the company, coincident with a company stock promotion paid for by one of his customers, to help create the false appearance of active trading in the company stock at steadily increasing prices. This manipulative activity allowed Norton's customers to liquidate their company stock at artificially inflated prices, generating a total of approximately $10 million in net sales proceeds and over $400,000 in commissions for Norton and the firm.
Resolution
Decision
Bar
Bar (Permanent)
Registration Capacities Affected
All Capacities
Duration
Indefinite
Start Date
3/21/2022
Sanctions
Disgorgement
Amount
$240,360.00
Sanctions
Monetary Penalty other than Fines
Amount
$13,537.20
Sanctions
prejudgment interest on disgorgement
Regulator Statement
Hearing Panel decision rendered January 31, 2022, wherein Norton is ordered to pay disgorgement in the amount of $240,360, plus interest, barred from association with any FINRA member in all capacities, and ordered to pay costs in the amount of $13,537.20. The sanctions are based on the findings that Norton willfully violated Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and violated FINRA Rule 2020 by manipulating the price of an over-the-counter (OTC) microcap security. The findings stated that Norton bought 250 shares of the company for his member firm's proprietary account at $5 per share, setting in motion the manipulation. A "Lock Up/Leak Out" agreement between the customers and the issuer was in place, limiting the percentages of shares the shareholder could sell during certain periods. However, Norton was aware of an escape clause in the agreement that was triggered if the company reached certain market capitalization levels. By artificially setting the stock's closing price at $5 for three consecutive trading days, the agreement's escape clause was triggered, and the shares were released from the trading restrictions, allowing Norton's customers to liquidate their company stock at artificially inflated prices. As a result of the manipulative trading, firm customers sold around $13.2 million shares of the company, generating about $8.5 million in net trading proceeds. From the trading, Norton and the firm generated $400,600 in trading compensation. As compensation, Norton received around 60 percent of the revenue he generated from the trading. The findings also stated that Norton coordinated trading among his customers to help further the appearance of active trading in the stock at stable or increasing prices. Norton entered orders for and executed both sides of the trades and also used his firm's proprietary trading account to execute manipulative trades. The findings also included that despite being aware of many red flags, Norton failed to raise concerns about his customers engaging in a manipulative trading scheme to his firm. Norton knew that his customers had all acquired their shares on the same terms, price, and under nearly identical stock purchase agreements. Norton also knew that the shares were deposited at the firm at or about the same time. Yet Norton failed to raise these concerns with anyone at the firm, nor did he ask any of his customers about these similarities. Instead, Norton chose to rely merely on his customers' representations on stock deposit forms that they were not acting in concert. The decision is final on March 21, 2022.
Broker Comment
The Firm (and its management) and the relevant representative deny Enforcement's allegations as such allegations are not supported by evidence and are speculative in nature. The Firm and the registered representative at issue do not engage in marketplace manipulation and have engaged in constant, increasing, and good faith efforts to make sure that, in regard to market manipulation and AML, the Firm does not allow its clients to use the Firm to "facilitate criminal activity," of any kind, through the Firm. The Firm likewise endeavors in constant and appropriate supervision of its representatives, and the Firm and its management act consistent with the good faith and high standards of commercial trade. Enforcement's allegations to the contrary are simply incorrect.
