SEC, FINRA Enforcement Roundup: Insider Trading Ring Busted; Raymond James Hit

The Securities Exchange Act and the Sarbanes-Oxley Act require foreign public accounting firms to provide the SEC upon request with audit work papers involving any company trading on U.S. markets. The SEC has charged BDO China Dahua Co. Ltd, Deloitte Touche Tohmatsu Certified Public Accountants Ltd, Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership) and PricewaterhouseCoopers Zhong Tian CPAs Limited with violating both acts.

According to the SEC’s order instituting the proceedings, its investigators have been trying for the past several months to obtain documents from these firms. The audit materials are being sought as part of SEC investigations into potential wrongdoing by nine China-based companies whose securities are publicly traded in the U.S. The audit firms have refused to cooperate in the investigations.

The SEC has launched an initiative to address concerns arising from reverse mergers and foreign issuers. Through the work of a Cross Border Working Group, the agency has deregistered the securities of nearly 50 companies and filed fraud cases against more than 40 foreign issuers and executives.

The SEC’s Enforcement Division has also taken a series of actions against China-based audit firms. Earlier this year, the SEC announced an enforcement action against Shanghai-based Deloitte Touche Tomatsu for refusing to produce documents for an SEC investigation into one of its China-based clients. That proceeding is ongoing. The SEC previously filed a subpoena enforcement action in federal court against the firm for failing to produce documents in response to a subpoena pertaining to its longtime client Longtop Financial Technologies Limited.

In the separate administrative proceeding against Longtop, an administrative law judge found that Longtop was delinquent in its reporting obligations and ordered Longtop’s securities registration to be revoked.

“Only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from the dangers of accounting fraud,” said Robert Khuzami, director of the SEC’s Division of Enforcement, in a statement. “Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions.”

FINRA Fines, Censures Wedbush Over Supervisory Failures on Compliance

Wedbush Securities Inc. and two registered principals, Richard Anthony Lanni and Ronald Edward Vogel, were censured and fined by FINRA on findings that findings that the firm, acting in part through Lanni, failed to establish and maintain a supervisory system reasonably designed to achieve the firm’s compliance with applicable laws, rules and regulations with respect to the variable annuity (VA) business the firm and some registered representatives transacted.

Without admitting or denying the allegations, the firm, Lanni and Vogel agreed to the entry of the findings and to the sanctions, which cost the firm a fine of $375,000 and Lanni a fine of $10,000 jointly and severally with the firm, as well as suspension from association with any FINRA member in any principal capacity for 60 days. Vogel was fined $5,000 jointly and severally with the firm, and was suspended from association with any FINRA member in any principal capacity for one month.

According to FINRA’s findings, the firm, acting through Lanni, in part, and through other principals, failed to establish, maintain and enforce WSPs reasonably designed to achieve compliance with applicable laws, rules and regulations concerning VAs and general sales practices. The findings also stated that the firm, acting through Lanni, Vogel and another principal, failed to supervise the registered representatives in a manner reasonably designed to achieve compliance with applicable laws, rules and regulations concerning VAs, and to detect the registered representatives’ misconduct.

Vogel and another principal failed to thoroughly review transactions, and approved transactions that were unsuitable and did not comply with the firm’s written supervisory and compliance procedures; the other principal, Lanni and/or Vogel failed to adequately investigate red flags.

Lanni and Vogel were also responsible for conducting periodic office inspections of the branch office, which they did, and the firm’s compliance department conducted an inspection annually but the inspections failed to detect that the registered representatives destroyed transaction documents that reflected unapproved and/or unauthorized VA withdrawal requests to insurance companies and failed to retain and review the related correspondence. The findings further included that the firm also failed to adequately review the representatives’ e-mail correspondence.

FINRA found that the firm, acting through a principal, failed to conduct an adequate prehire investigation, in that the firm had sufficient information to indicate reasonably at the time of hire that the registered representatives had a history of customer complaints, including pending customer complaints, and that they made material misrepresentations concerning the pending customer complaints to the firm, including on initial and amended Forms U4, involving the sale of VAs. FINRA also found additional deficiencies.

Garden State Securities Censured, Fined by FINRA

Garden State Securities was fined $265,000, censured and required to have certain personnel complete 16 hours of antimoney-laundering training, as well as to certify to FINRA that it has review its supervisory system and WSPs for compliance with rules applying to preservation of electronic communications.

Without admission or denial, the firm consented to FINRA’s entry of findings that, acting through its chief compliance officer (CCO) and AML compliance officer (AMLCO), the firm failed to develop and implement a written AML program reasonably designed to ensure its compliance with the Bank Secrecy Act; to monitor, detect and investigate suspicious transactions; and determine whether to file a Suspicious Activity Report (SAR) in response to multiple red flags relevant to customers’ accounts, including certain red flags specifically cited in the firm’s own AML procedures.

The findings stated that the firm, acting through the individual, failed to implement its CIP. The firm opened new accounts for individuals and entities such as partnerships, but failed to obtain the necessary documentation establishing the customer’s identity or status as a legal entity; and, acting through the individual, also failed to verify the identity of certain customers by using required documentation. Also acting through the individual, the firm failed to establish and implement risk-based procedures for foreign correspondent accounts of foreign financial institutions reasonably designed to detect and report through enhanced due diligence known or suspected money laundering activity involving the correspondent accounts, as required by the Bank Secrecy Act, and to perform enhanced due diligence of these accounts.

FINRA also found numerous other violations, including failure to complete accurate annual certifications for two years and other reporting and certification failures, including in the area of customer complaints, records maintenance, telemarketing, training and supervision.