SEC, FINRA Enforcement: Swiss-Based Firm Bilks U.S. Investors of $11M

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.