The Commission has increasingly focused on anti-money laundering compliance and the filing of SARs. See, e.g., SEC v. Alpine Securities Corp., No. 1:17-cv-04179 (S.D.N.Y. Filed June 5, 2017). Earlier this year the agency filed an administrative proceeding against a broker dealer. Now that action has settled. In the Matter of Windsor Street Capital, Adm. Proc. File No. 3-17813 (July 28, 2017).
Respondent is a registered broker-dealer. The Order alleges that over a ten month period beginning in January 2014 the firm sold hundreds of millions of shares of stock issued by four firms on behalf of two customers. None of the stock was registered.
The two customers represented to the broker that the shares were exempt from registration under Section 5 of the Securities Act, citing Rule 144. The two customers claimed that they were not affiliated with the issuers, that they had held the securities for over one year and that the firms were not shell companies. If these representations were correct, the shares would be exempt under Rule 144. For each of the stocks, however, at least one of the representations was false. The Order does not specify which representation was false for each stock.
The broker-dealer accepted the representations of its customers on their face. No inquiry was undertaken. If a reasonable inquiry was undertaken it would have “at least, cast doubt on the factual underpinnings” of the client representations, according to the Order. The basis for the doubt is not detailed.
The rules relating to SARs specify that if the broker “knows, suspects, or has reason to suspect that the transaction . . .” or a transaction involves funds from illegal activity, or that the activity is intended to hide or disguise funds are designed to evade the money laundering requirements, or if the firm has no apparent lawful business or is involve in facilitating criminal activity, a report must be filed.
Meyers Associates has a written AML program to facilitate compliance with those rules. The program specifies that the firm will monitor account activity for unusual size, volume, patterns or types of transactions in view of certain red flags. Those flags include a customer’s reluctance to provide complete information about its business and patterns such as the deposit of certificated stock, its immediate sale and then the transfer out of the funds and undergoing frequent material changes in business strategy or the line of business.
Pursuant to the firm’s AML Program, when a red flag or other suspicious activity is detected the AML Compliance Person is to be contacted. That person will then determine if and how to investigate and what action should be taken.
Despite the program Meyers repeatedly violated Exchange Act Section 17(a) and Rule 17a-8 by failing to file SARs when appropriate. The violations are based on permitting customers to deposit large blocks of penny stocks, liquidate them, and then transferring out the proceeds. Myers Associates failed to investigate these transactions. The Order alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 17(a).
In resolving the case the firm agreed to a series of undertakings. Those include agreeing not to accept the deposit of stocks valued under $5.00 and to retain an independent consultant. The firm also consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. Meyers Associates will pay a penalty of $200,000. The COO previously settled with the Commission.