SEC Obtains Freeze Order Over Transfer Agent

by Dorsey & Whitney LLP
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Transfer agents perform critical services for issuers and shareholders. The duties of those agents include maintaining the issuer’s security holder records, the issuance and cancellation of certificates and the distribution of dividends. They are critical to the successful completion of secondary offerings. Agents must registered with the Commission and are subject to its rules.

Now the Commission has brought an enforcement action against a transfer agent and its principal arising from the staff’s examination. Specifically, an action was brought against Illinois Stock Transfer Company or IST and its president and sole owner, Robert G. Pearson. An emergency freeze order was obtained on filing. SEC v. Pearson, Civil Action No. 14 C 3785 (N.D. Ill. Filed May 22, 2014).

ITS provides transfer agent and registrar services to approximately 130 issuers. The firm entered into an agreement to provide certain services with each issuer. Those services included providing dividend disbursements and interest paying agent activities and dividend reinvestment plan services for certain issuers.

In October 2013 the staff conduced an examination of the firm. During that examination the staff reviewed a firm account at BMO Harris Bank. Mr. Pearson informed the staff that funds deposited in the account came from two primary sources. The first was corporate issuers using IST as a paying agent to make cash disbursements to shareholders for share exchanges. The second was from dividend reinvestment checks. The account also held a small amount of funds to pay for insurance against lost security certificates.

Since the bank records for the Harris Bank account were not available, Mr. Pearson furnished them to the staff in early 2014. Those records revealed several transactions that appeared to relate to payroll. When asked about those transactions Mr. Pearson eventually admitted that in fact payroll was in part funded from the account, although he initially offered an alternate explanation. After securing counsel Mr. Pearson produced two schedules showing that he had used client funds for other purposes totaling about $1.3 million. He explained that the firm, which had not filed tax returns for years, could not meet its financial obligations and that he intended to repay the disbursements.

At the conclusion of the examination, the staff concluded that IST had several deficiencies which include: 1) failing to safeguard funds and securities; 2) failing to maintain adequate control over the inventory of blank stock certificates and dividend checks; 3) not complying with its obligation to report lost or stolen securities; 4) failing to file an annual study and evaluation of internal accounting controls describing any material inadequacies; 5) not providing written notice of its assumption or termination of transfer agent services to the appropriate qualified registered securities depository; and 6) failing to timely report lost or stolen securities.

The complaint alleges violations of Exchange Act Section 10(b) and Rules 10b-5(a) and 10b-5(c). It also alleged violations of Exchange Act Section 17A(d)(1) and Rules 17Ad-12, 17Ad-13, 17Ad-16 and 17f-1 and aiding and abetting under Exchange Act Section 20(e). The case is pending. See Lit. Rel. No. 23007 (May 28, 2014).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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