SEC And FINRA Fine Broker-Dealer, CEO, And Compliance Officer For Failing To File Suspicious Activity Reports
04/03/2018On March 28, 2018, the Securities and Exchange Commission (“SEC”) instituted settled administrative proceedings against broker-dealer Aegis Capital Corporation (“Aegis”), its founder and Chief Executive Officer (“CEO”), and its anti-money laundering compliance officer (“AML CO”) for allegedly failing to file hundreds of Suspicious Activity Reports (“SARs”) between late 2012 and early 2014. In the Matter of Aegis Capital Corporation, Admin. Proc. No. 3-18412 (Mar. 28, 2018); In the Matter of Kevin McKenna and Robert Eide, Admin. Proc. No. 3-18413 (Mar. 28, 2018). The SEC also instituted a contested administrative proceeding based on the same allegations against a former Aegis compliance officer. In the Matter of Eugene Terracciano, Admin. Proc. No. 3-18414 (Mar. 28, 2018). Separately, the Financial Industry Regulatory Authority (“FINRA”) announced it had settled claims against Aegis based on the same SAR-related allegations. FINRA Fines Aegis Capital Corp. $550,000 for Anti-Money Laundering and Supervision Rule Violations, Mar. 28, 2018, http://www.finra.org/newsroom/2018/finra-fines-aegis-capital-corp-550000-aml-and-supervision-rule-violations. In connection with its settlement with the SEC, Aegis admitted to willfully failing to file SARs and was fined $750,000. In addition, the CEO agreed to pay the SEC a $40,000 fine, and the AML CO agreed to pay the SEC a $20,000 fine. In connection with the settlement, the individuals neither admitted nor denied the SEC’s allegations. Aegis was fined $550,000 in connection with its settlement with FINRA but neither admitted nor denied wrongdoing.
Pursuant to Treasury regulations implemented under the Bank Secrecy Act, Aegis was required to file SARs for any transaction by, at, or through the firm of at least $5,000 if it knew or had reason to believe that the transaction involved funds derived from illegal activity, had no business or lawful purpose, or facilitated criminal activity. 31 C.F.R. § 1023.320. According to the SEC, Aegis’ AML COs were responsible for filing SARs under Aegis’ internal compliance procedures. In addition, those procedures expressly identified transactions in low-priced securities as potential indicators of suspicious activity that could warrant filing SARs.
The SEC alleged that between late 2012 and early 2014, two Aegis AML COs failed to file SARs in connection with certain low-priced securities transactions, even though many of those transactions exhibited red flags specifically identified in Aegis’ written supervisory procedures. In one case, an unidentified private Swiss bank sold approximately 2.1 million shares of a low-priced security during a two-month promotional campaign touting the issuer’s business, which caused the price of the securities to spike. The AML COs allegedly did not file SARs, even though they received AML alerts from Aegis’ clearing firm warning that the transactions were potentially suspicious. The clearing firm further expressed concerns to Aegis personnel about Aegis’ low-priced securities practices and implemented specific restrictions on Aegis’ low-priced securities business. The latter included a requirement that, before Aegis customers could sell low-priced securities that had been physically deposited at the firm, either the AML CO, the CEO, or the COO had to sign a “red flag identifiers form” indicating that the signatory had reviewed the proposed transactions for red flags commonly associated with market manipulation in low-priced securities. Despite these alleged red flags, the SEC alleged that the AML CO never filed a SAR on Aegis’ behalf or generated written analyses indicating that he considered filing a SAR. In addition, the SEC alleged that the CEO failed to take adequate steps to ensure that Aegis filed the requisite SARs, even after the SEC’s Office of Compliance Inspections and Examinations sent him a letter in January 2014 identifying significant deficiencies in Aegis’ SAR-filing practices.
The SEC alleged similar failures by another Aegis AML CO, who served as an Aegis AML CO from September 2013 to September 2015 and was the firm’s primary point of contract with Aegis’ clearing firms regarding suspicious transaction activity. According to the SEC, he failed to file SARs on Aegis’ behalf, even after a clearing firm sent him a series of alerts identifying suspicious trading in several low-priced securities.
These cases reflect the SEC’s and FINRA’s continued scrutiny of broker-dealers’ AML-related programs, including their SAR-related practices. Particularly noteworthy in this case is the regulators’ decision to also hold individual compliance officers accountable for failure to file SARs.CATEGORY: Enforcement Actions