in the Matter of Aegis Capital Corp., Administrative Proceeding File No. 33-11086
SEC Charges Broker and Registered Representatives in Connection with Unsuitable Recommendations of Highly Complex Structured Securities
Litigation Release No. 25459 / July 29, 2022
Securities and Exchange Commission v. Alan Z. Appelbaum, No. 9:22-cv-81115 (S.D. Fla. filed July 28, 2022)
In the Matter of Paul F. Gallivan, Administrative Proceeding No. 33-11085
In the Matter of Aegis Capital Corp., Administrative Proceeding No. 33-11086
The Securities and Exchange Commission charged Aegis Capital Corp., former Aegis Managing Director Alan Z. Appelbaum, and former Aegis registered representative Paul F. Gallivan in connection with unsuitable recommendations of structured products to certain of Aegis's retail customers.
The SEC's complaint against Appelbaum, filed in the federal district court for the Southern District of Florida, alleges that he made unsuitable recommendations of highly complex variable interest rate structured products ("VRSPs") to seven customers. As the complaint alleges, despite the risky nature of the VRSPs, Appelbaum recommended these securities for seven customers who had a "moderate" risk tolerance, were unwilling to lose their entire invested principal, and typically had investment time horizons that were inconsistent with the VRSP maturity dates. The complaint further alleges that Appelbaum made materially false and misleading statements to customers in connection with his recommendation of the VRSPs and engaged in unauthorized trading. The SEC's complaint against Appelbaum charges him with violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
The SEC also instituted a settled administrative proceeding against Aegis, finding that fourteen Aegis brokers recommended VRSPs to forty-eight customers for whom the VRSPs were unsuitable in light of the customers' financial situation and needs, as reflected by their risk tolerance, investment objectives, age, investment experience, liquidity needs, and investment time horizon. The order finds that Aegis violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and the books and records requirements under Exchange Act Section 17(a)(1) and Rules 17a-3(a)(17)(i)(B)(1) and 17a-3(a)(17)(i)(B)(3) thereunder. The order further finds that Aegis failed to reasonably supervise its registered representatives with a view to preventing and detecting their violations of Sections 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Without admitting or denying the SEC's findings, Aegis agreed to a censure, to cease and desist from future violations of the charged provisions, and to pay disgorgement plus prejudgment interest of $220,865 and a civil penalty of $2.3 million.
Finally, the SEC instituted settled administrative proceedings against Gallivan, finding that he made unsuitable recommendations of VRSPs to four customers and made materially false and misleading statements to customers about the VRSPs. The order finds that Gallivan violated Sections 17(a)(2) and 17(a)(3) of the Securities Act. Without admitting or denying the findings in the order, Gallivan agreed to cease and desist from future violations of the charged provisions, to pay disgorgement plus prejudgment interest of $29,973 and a civil penalty of $25,000, to twelve-month associational and penny stock suspensions and a twelve-month investment company prohibition.
The SEC's investigation, which is ongoing, is being conducted by Drew Dorman, Kevin Gershfeld, Greg Hillson, and Anik A. Shah with the assistance of James Connor. This investigation is being supervised by Yuri B. Zelinsky and Stacy L. Bogert. The SEC's litigation against Mr. Appelbaum will be led by Mr. Connor and Eugene Hansen and supervised by Olivia Choe.