More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Among recent enforcement actions, the SEC charged a Swiss-based company and several individuals connected with it for doing investors out of millions.
Meanwhile, anti-money laundering played a big role in FINRA actions, as the agency went after COR Clearing for a broad range of regulatory failures, including AML, and fined and censured Argentus Securities over AML failures as well as others.
Malom Group 'Made A Lot Of Money' for Its Perpetrators, Not Investors
A Swiss-based company whose name was an acronym for "Make A Lot Of Money" was certainly doing that for itself, but not for its investors, as the SEC charged it and several individuals connected with bilking investors out of $11 million.
According to the SEC, Malom Group AG and several individuals conducted a pair of advance fee schemes guaranteeing astronomical returns to investors in purported prime bank transactions and overseas debt instruments, from Las Vegas and Zurich. Between lies and forged documents, Malom and six individuals parted investors from substantial sums through the scams.
According to the agency, Malom charged fees to investors for nonexistent services, and the individuals running the scam kept the money for personal use. Then they lied to investors who asked about the progress of the transactions, and came up with excuses about the lack of investment returns or refunds.
The six individuals charged along with Malom Group were also charged by the U.S. Department of Justice in a parallel criminal action. They are:
Anthony Brandel of Las Vegas, who served as Malom Group’s main point of contact with U.S. investors. He "explained" the investments, collected the money and soothed worried investors. His Las Vegas company M.Y. Consultants also is charged in the SEC’s complaint.
Sean Finn of Whitefish, Mont., who recruited U.S. investors through his Wyoming-based company M. Dwyer LLC, which also is charged in the SEC’s complaint.
Hans-Jürg Lips of Switzerland, who has been described as the Malom Group’s president or chairman of the board of directors.
Joseph Micelli of Las Vegas, who has been described as Malom Group’s compliance officer.
Martin Schläpfer of Switzerland, who has been described as Malom Group’s chief executive officer, managing director and legal counsel.
James Warras of Waterford, Wis., who has been described as Malom Group’s executive vice president.
The agency said that the schemes ran from 2009 to 2011, but the perpetrators continued to stall investors into 2013. None of the transactions in securities offered or sold were registered with the SEC or eligible for an exemption.
In the first scheme, they offered “joint venture” agreements that supposedly allowed investors to “use” Malom Group’s financial resources in exchange for an upfront fee. Investors had to propose investment transactions for Malom Group to enter into with third parties in order to generate returns for the company and the investor. Malom Group provided investors with forged bank statements and “proof of funds” letters to make investors believe the money was there to carry out those transactions.
Before investors paid the upfront fees, the Malom Group executives and promoters usually knew at least the basic details of the proposed trading programs, in some cases actually providing the trading program for investors to propose. But once they got their hands on the fees, Malom Group proceeded to reject every proposed transaction, while keeping the fees to keep the scheme going and to enrich themselves.
The second scheme promised investors that Malom Group would generate funding by creating structured notes that would be listed on “Western European” exchanges. Investors were hit up for "underwriting fees" and also had to make personal and corporate guarantees of repayment, after which Malom Group reneged on the guarantees of repayment and failed to issue any structured notes. In this instance, too, the perpetrators kept the money for themselves.
The SEC seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.
FINRA Fines Deutsche Bank Securities for Deficiencies in Lending Program
FINRA fined Deutsche Bank Securities, Inc. (DBSI) $6.5 million and censured the firm for "serious" financial and operational deficiencies primarily related to its enhanced lending program. The violations, which were originally identified during a 2009 examination, included lack of transparency in the firm's financial records and inaccurate calculations resulting in overstated capitalization and inadequate customer reserves.
Brad Bennett, FINRA executive vice president and chief of enforcement, said, "First and foremost, a brokerage firm must ensure that its customer assets are protected. DBSI's financial accounting lacked the transparency and accuracy necessary to enable FINRA to oversee the firm and to protect customer assets."
DBSI neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Under DBSI's enhanced lending program, which involves mostly hedge fund customers, the firm arranges for its London affiliate, Deutsche Bank AG London (DBL), to lend cash and securities to DBSI's customers. FINRA's 2009 examination of the firm uncovered a number of serious problems in connection with this program. For example, the firm's books reflected that it owed $9.4 billion to its affiliate, but neither the firm nor FINRA examiners could readily determine which portions of that debt were attributable to the customers' enhanced lending activity, and which were attributable to DBL's own proprietary trading. The lack of transparency in DBSI's books and records meant the firm was unable to readily monitor the accounts originating out of the enhanced lending business.
FINRA also found that there were instances where DBSI made inaccurate calculations that resulted in the firm overstating its capital or failing to set aside enough funds in its customer reserve account to appropriately protect customer securities. For example, DBSI incorrectly classified certain enhanced lending stock loans; when it reclassified them in April 2010, DBL was obligated to pay a margin call of $3.1 billion. DBSI improperly computed its payable balance, thus reducing the firm's reported liabilities and inaccurately overstating the firm's net capital.
Separately, in March 2010, the firm incorrectly computed its customer reserve formula. As a result, the firm's customer reserve fund was deficient by $700 million to $1.6 billion during March 2010.
COR Clearing Censured, Fined $1 Million by FINRA
COR Clearing LLC found itself censured and fined $1 million by FINRA over numerous failures to comply with anti-money laundering (AML), financial reporting and supervisory obligations. The firm must also retain an independent consultant to conduct a comprehensive review of its relevant policies, systems, procedures and training; to submit proposed new clearing agreements to FINRA for approval while the consultant conducts its review; and for one year, submit certifications from its chief executive officer and chief financial officer stating that each has reviewed the firm's customer reserve and net capital computations for accuracy prior to submission.
Repeated examinations of the firm from 2009–2013 not only revealed numerous violations, but repeat offenses as well. COR, which provides clearing services for approximately 86 correspondent firms through fully disclosed clearing arrangements, was found by FINRA to have an AML surveillance program that did not reasonably address the risks of its business model.
FINRA also found that many of these correspondent firms had been the subject of past disciplinary action for AML-related rule violations. Notwithstanding the heightened AML risk, FINRA found that COR's surveillance program failed to identify "red flags" related to its correspondent firms and transactions by their customers.
Specifically, FINRA found that for several months in 2012, COR's AML surveillance system suffered a near-complete collapse, resulting in the firm's failure to conduct any systematic reviews to identify and investigate suspicious activity. Also, in 2009, COR implemented a "Defensive SARS" program, which the firm used to file suspicious activity reports without first completing the investigation necessary to support filing the report.
COR also made numerous financial reporting errors over the four-year period, including repeatedly making erroneous customer reserve and net capital computations, and filing inaccurate FOCUS reports with FINRA. In addition, FINRA found that COR had racked up an impressive list of supervisory violations, including failing to establish adequate supervisory systems relating to Regulation SHO, the outsourcing of back-office functions, and the firm's funding and liquidity. Last but not least, COR failed to retain and review e-mails of one of its executives and failed to ensure that its president was properly registered as a principal.
COR neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Argentus Securities Censured, Fined by FINRA on AML Failures
Argentus Securities LLC of Dallas was censured and fined $15,000 by FINRA after the agency found that its anti-money laundering (AML) program required monitoring for potentially suspicious activity and AML red flags, investigating potentially suspicious activity and reporting suspicious activity by filing a suspicious activity report (SAR), as appropriate. When the firm received stock certificates from third parties into a customer’s account in the names of the third parties, and the shares were later liquidated, and the proceeds distributed to the customer back to the third parties, the firm failed to adequately supervise and monitor the activity, and report it on a SAR.
The firm had a number of foreign associates and processed a significant amount of wires originating from clients in South America. But sometimes the firm failed to adequately investigate and monitor some of the wires for suspicious activity or report it. Even when a wire transfer, by a customer, purportedly to a third party, was to an unrelated third party and the customer’s explanation was inconsistent with his stated business purpose and the facts, the firm permitted the activity to continue and failed to report it on a SAR.
In another instance, one customer, over the course of about a year, deposited $2 million into his account and later transferred the money via wire transfers to various third-party bank accounts, but only conducted two securities transactions. The firm did not report it and allowed the behavior to continue. It also failed to file a SAR and allowed activity to continue when a foreign customer, without explaining why, limited part of a wire transfer below the $10,000 threshold, when he had earlier attempted to keep other simultaneous transfer disbursements, to an overseas account, slightly below the threshold. The firm lacked an adequate employee AML training program.
FINRA also found that the firm didn't have adequate supervisory monitoring and review procedures to handle the content of an investment-related radio show broadcast by its representative, and discovered numerous other supervisory failures including creating a potential conflict of interest by assigning the spouse of a registered representative to supervise her husband.
The firm has neither admitted nor denied the findings.
Check out SEC, FINRA Enforcement: Muni Firm Fined Over Sports Ticket Gifting on ThinkAdvisor.