New York-based broker-dealer Oppenheimer & Co. agreed Tuesday to pay a $20 million fine — $10 million to the Securities and Exchange Commission and $10 million to the Treasury Department’s Financial Crimes Enforcement Network — for violating federal securities laws while improperly selling penny stocks in unregistered offerings on behalf of customers as well as anti-money laundering violations.
FinCEN charged Oppenheimer with willfully violating the Bank Secrecy Act, failing to establish and implement an adequate anti-money laundering program, failing to conduct adequate due diligence on a foreign correspondent account, and not complying with requirements under Section 311 of the USA PATRIOT Act.
The SEC states that Oppenheimer agreed to admit wrongdoing for engaging in two courses of misconduct: aiding and abetting illegal activity by a customer, Gibraltar Global Securities, a brokerage firm in the Bahamas not registered to do business in the U.S., and engaging on behalf of another customer in unregistered sales of billions of shares of penny stocks.
According to the SEC’s order instituting a settled administrative proceeding, Oppenheimer ignored “red flags” that business via Gibraltar Global Securities “was being conducted without an applicable exemption from the broker-dealer registration requirements of the federal securities laws.”
Oppenheimer “executed sales of billions of shares of penny stocks for a supposed proprietary account in Gibraltar’s name while knowing or being reckless in not knowing that Gibraltar was actually executing transactions and providing brokerage services for its underlying customers, including many in the U.S.”
The SEC separately charged Gibraltar last year for its alleged misconduct.
Oppenheimer said in a statement that it is “pleased to put these matters, which involve activity that occurred years ago, behind it. The ability to finalize matters involving two regulatory agencies in a coordinated manner was helpful in bringing this matter to a conclusion.”
The SEC also found that Oppenheimer failed to file Suspicious Activity Reports (SARs) as required under the Bank Secrecy Act to report potential misconduct by Gibraltar and its customers, and the firm failed to properly report, withhold and remit more than $3 million in backup withholding taxes from sales proceeds in Gibraltar’s account.
“Despite red flags suggesting that Oppenheimer’s customer’s stock sales were not exempt from registration, Oppenheimer nonetheless allowed unregistered sales to occur through its account, failing in its gatekeeper role,” said Andrew Ceresney, director of the SEC’s Division of Enforcement, in a statement. “These actions against Oppenheimer demonstrate that the SEC is fully committed to addressing lax AML compliance programs at broker-dealers through enforcement action.”
Oppenheimer also failed to recognize the resulting liabilities and expenses in violation of the books-and-records requirements, and improperly recorded transactions for Gibraltar’s customers in Oppenheimer’s books and records.
The SEC also found that Oppenheimer engaged on behalf of another customer in unregistered sales of billions of shares of penny stocks. The SEC’s investigation, which is continuing, found that the sales generated approximately $12 million in profits of which Oppenheimer was paid $588,400 in commissions. “The firm’s liability stems from its failure to respond to red flags and conduct a searching inquiry into whether the sales were exempt from registration requirements of the federal securities laws, and its failure reasonably to supervise with a view toward detecting and preventing violations of the registration provisions,” the SEC states.
FinCEN and the New York Stock Exchange assessed a civil money penalty of $2.8 million against Oppenheimer in 2005 for similar AML and Bank Secrecy Act violations.
In 2013, the Financial Industry Regulatory Authority fined the firm $1.4 million for violations of securities laws and anti-money laundering failures.
“Broker-dealers face the same money laundering risks as other types of financial institutions,” noted FinCEN Director Jennifer Shasky Calvery, in a statement. “And by failing to comply with their regulatory responsibilities, our financial system became vulnerable to criminal abuse. This is the second time FinCEN has penalized Oppenheimer for similar violations. It is clear that their compliance culture must change.”
Tuesday’s “sanctions also reflect some of the prior actions against Oppenheimer,” Ceresney said on a Tuesday call with reporters.
In addition to the monetary remedies, Oppenheimer agreed to be censured and to retain an independent consultant to review its policies and procedures over a five-year period.
— Check out FINRA Fines Oppenheimer & Co., Trader for Overcharging on Muni Trades on ThinkAdvisor.