SEC Charges BD, COO With Failing to File SARs
The Commission has long focused on microcap fraud by, among other things, bringing manipulation actions centered on penny stocks. OCIE and FINRA have also issued guidance for compliance departments on red flags to watch for which may suggest such a fraud. And, if there is suspicious activity FINCEN requires that a suspicious activity report or SAR be filed — a requirement reinforced by Exchange Act Section 17(a) and Rule 17a-8. The Commission’s latest case in this area involves a broker-dealer who ignored the warning signs, according to the Order In the Matter of Windsor Street Capital, L.P, Adm. Proc. File No. 3-17813 (January 25, 2017).
Windsor Street is a registered broker-dealer which does business as Myers Associates, L.P. Respondent John Telfer was the chief compliance and AML officer during the relevant period.
Over a ten month period, beginning in January 2014, the broker-dealer sold hundreds of millions of shares of stock issued by MedGen, Inc., Alternaturals, Inc. Manzo Pharmaceuticals, Inc. and Solpower, Inc. The customers were Raymond Barton and William Goode.
None of the shares were registered with the Commission. The shares qualified for an exemption under Rule 144 based on the representations of Messrs. Barton and Goode. They claimed that the shares were exempt from registration, had been held for over one year and that the issuers were not shell companies. As to each company one or more of the representations was false. Myers Associates received about $120,000 in commissions from the sales.
The broker and its chief compliance officer also failed to file SARs in connection with the transactions. The firm had an AML program which required monitoring of account activity for unusual size, volume pattern or type of transactions as well as typical red flags. Those included the reluctance of a customer to provide complete information about the nature and purpose of the business, the customer has a questionable background, there were suspicious trading patterns and similar items. Mr. Telfer was notified if there was a red flag and determined what additional action, if any, should be taken. FINRA and OCIE have posted lists of red flags on their respective websites which are similar to those identified in the AML program.
Here the firm repeatedly failed to file a SAR. Mr. Telfer aided and abetted that violation. The violations all relate to Meyers Associates’ penny stock liquidation business. In connection with that business the firm routinely accepted physical deposits of large blocks of penny stocks for liquidation. The customer would then sell the shares and transfer out the sale proceeds immediately. The forms filed by the customers put the firm on notice of numerous red flags identified by its AML program. For example, one customer for which the firm failed to file a SAR, traded shares of a penny stock issuer by quickly selling them and wiring out the proceeds. The trader had been convicted of securities fraud as the firm learned through an internet search and furnished representations about how he acquired the stock that were inconsistent with the documentation. Another customer had just settled a Commission enforcement action and pleaded guilty in a related criminal case, according to information learned by the registered representative. The customer acquired the shares deposited under suspicious circumstances and sold them while they were being touted by the company. Overall, the customers repeatedly exhibited conduct which constituted evidence of the red flags under the ALM program.
The Order alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 17(a) and Rule 17a-8. The matter will be set for hearing. See also SEC v. Barton, Civil Action No. 2:17-cv-00403 (E.D.N.Y. Filed January 25, 2017)(manipulation action naming as defendants Raymond Barton, William Goode, Matthew Briggs, Kenneth Manzo and Justin Sindelman, alleging violations of Exchange Act Section 10(b) and Securities Act Sections 5(a), 5(c) and 17(a); settled by Messrs. Barton, Goode and Briggs with consents to orders requiring them to pay disgorgement plus interest and penalties of over $8.7 million; Mr. Manzo admitted wrongdoing and will pay over $95,000; the action continues as to defendant Sindelman).