The Financial Industry Regulatory Authority (FINRA) has filed a complaint against Spartan Capital Securities LLC, its Chief Executive Officer John Dennis Lowry, and its then-Chief Compliance Officer Kim Marie Monchik.

The Department of Enforcement alleges that from April through July 2021 (the Relevant Period), Respondents Spartan, Lowry, and Monchik, engaged in a scheme to defraud firm customers who owned restricted shares of a pharmaceutical issuer that they wished to sell shortly after the company’s initial public offering (IPO) underwritten by Spartan.

Specifically, in 2017 and 2019, Spartan served as placement agent for private offerings of a company involved in developing Alzheimer’s treatments, through which Spartan received millions of shares of the issuer, some of which it distributed to its employees, including Monchik.

The pre-IPO shareholders, including Spartan, some of its employees, and many of Spartan’s customers, were eager to sell their shares soon after the IPO. However, all the pre- IPO shares were restricted from resale. Spartan, through Monchik, informed its customers that they would need to complete a cumbersome and time-consuming process, involving Spartan, the issuer, an outside lawyer, the issuer’s transfer agent, and Spartan’s clearing firm, to have the share restrictions lifted and be able to sell in the public markets.

Spartan, Lowry, and Monchik, however, were aware of a process by which holders of restricted shares could sell their stock immediately by selling their shares short, “deemed owned,” which gave the seller an extended 35-day settlement period to complete the process of delivering unrestricted shares.

Spartan reserved the sold short, “deemed owned” process for itself and select employees, who began selling their own holdings at the outset of the IPO while only offering their customers the far slower process for removing their share restrictions. Through this scheme, Spartan, Lowry (through his ownership of Spartan), Monchik, and other Spartan employees sold at far higher prices than Spartan’s customers, who had to undergo the slower process and wait six weeks or more to sell their shares. Spartan never informed its customers of the “deemed owned” process or that Spartan or its employees were availing themselves of this quicker process.

By the time any of Spartan’s customers were able to sell pre-IPO shares, the issuer’s sale price had fallen dramatically, and Spartan and its employees had made over $50 million in profits from their sales of pre-IPO shares.

FINRA’s Department of Enforcement accuses Spartan, Lowry and Monchik of violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) thereunder; FINRA Rule 2010 by contravening Section 17(a)(3) of the Securities Act of 1933; and FINRA Rules 2020 and 2010.

Spartan, through Monchik, is accused of having violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) thereunder; FINRA Rule 2010 by contravening Section 17(a)(2) of the Securities Act of 1933; and FINRA Rules 2020 and 2010.

Spartan also allegedly violated multiple provisions of FINRA’s Corporate Financing Rule (FINRA Rule 5110). As underwriter of the IPO, Spartan was required to make certain filings with FINRA’s Corporate Financing Department, which determines whether underwriting terms and conditions, including underwriting compensation, are fair and reasonable.

Spartan allegedly failed, when disclosing the underwriting compensation to FINRA and in public filings, to include $475,000 and 500,000 shares that the issuer paid Spartan to help prepare for the IPO and associated uplisting to a national exchange. When added to the consideration that Spartan did disclose, that undisclosed compensation rendered Spartan’s total underwriting compensation unreasonable. That failure, and Spartan’s failure to disclose it, while participating in the IPO, allegedly violated FINRA Rules 5110 and 2010.

In addition, Spartan is accused of failing to establish and maintain a reasonable supervisory system. Spartan and its employees who held pre-IPO shares had an obvious conflict of interest in selling their shares short, “deemed owned” while the firm’s customers waited for the lengthy process of removing their share restrictions before selling. The firm failed to mitigate this conflict but instead allowed Lowry and other firm employees who owned pre-IPO shares to supervise the sales of those shares and the firm’s communications with customers who owned shares.

The firm also had no supervisory system, including written procedures, to supervise for compliance with the Corporate Financing Rule. By failing to supervise, Spartan allegedly violated FINRA Rules 3110(a) and (b) and 2010.