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FINRA Enforcement: Sterne Agee Fined Over Lost Laptop

By Marlene Y. Satter

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Among recent actions by the Financial Regulatory Authority were the censure and fine of Capital Guardian LLC for failure to investigate and follow up red flags on the liquidation of Venezuelan bonds into U.S. dollars.

In addition, FINRA censured and fined J.P. Morgan Clearing and Sterne Agee, the former for failures relating to short positions and the latter for supervisory failures relating to confidential customer and proprietary information.

Sterne Agee Put Client Data on Laptop, Then Lost It

FINRA censured Sterne Agee and fined the firm $225,000 on findings that the firm failed to establish and maintain a supervisory system reasonably designed to protect confidential customer and proprietary information.

Customer information was placed on an unencrypted laptop, which was subsequently lost. As a result, FINRA found that the firm placed customers’ personal and confidential information at risk.

In addition, the findings stated that supervisory procedures were insufficient to ensure that the firm’s most sensitive customer and proprietary information stored on laptops was being adequately safeguarded by appropriate technology.

The firm neither admitted nor denied the findings, but consented to the sanctions. It must also conduct an internal review of its policies, procedures, systems and training with regard to compliance with Regulation S-P of the Securities Exchange Act of 1934.

Capital Guardian Fined for Missing Suspicious Venezuelan Bond Transactions

FINRA censured Capital Guardian and fined it $125,000 after it found that the firm failed to detect, investigate and report potentially suspicious transactions. Among those transactions were some related to money movements into and out of customer accounts that experienced minimal securities activity.

Other transactions that raised red flags were those involving the deposit and quick liquidation of Venezuelan bonds issued under the Transaction System for Foreign Currency Denominated Securities (SITME) program, which allowed for Venezuelan entities, and to a lesser extent individuals, to convert Venezuelan Bolivars (VEF) to U.S. dollars (or other currency foreign to Venezuela). Entities or individuals would purchase approved dollar-denominated Venezuelan bonds locally in VEF and then sell the bonds abroad for dollars under the program.

According to FINRA, approximately 30 customer accounts were opened at the firm that a former registered representative serviced, which were all held in the name of entities that were beneficially owned by citizens of Venezuela. The accounts presented a higher risk of potentially suspicious activity based on their geographic location and business model, which included the liquidation of Venezuelan sovereign and state-sponsored bonds.

FINRA said that a small number of the accounts did not liquidate Venezuelan bonds, but instead engaged in frequent money movements without corresponding securities transactions. In addition, during the account-opening process for some of the accounts, the registered representative prepared attestations for the firm regarding the expected activity in the accounts, which indicated that the accounts were associated with the SITME program.

According to the agency, when the firm accepted customers engaged in SITME activity, it did not update its anti-money laundering policies and procedures to take into account the risks those customer accounts posed. In addition, FINRA found that once the dollar-denominated Venezuelan bonds were received, most of those accounts would liquidate and then transfer the proceeds from the bonds via first-party wire to operating accounts they held at other U.S. broker-dealers or banking institutions.

Frequently, however, many of the accounts transferred the bond proceeds via third-party wires (or even, sometimes, via check or ATM withdrawal), which set up red flags under the firm’s AML Compliance Procedures (AMLCP) because such actions differed from expected activity under SITME and for the accounts themselves. Also, despite the fact that the accounts were set up as investment accounts, instead they were used almost exclusively to transfer and liquidate SITME bonds. As a result, there was virtually no investment activity in any of the accounts. FINRA also found that because the majority of the accounts were maintained by the same or related beneficial owners, there were often transfers to and from related accounts that did not comport with SITME regulations or the expected activity in the accounts.

FINRA found that not only did the firm fail to adequately monitor the accounts, it also failed to have AML procedures that were up to the task of tackling the risks posed by accounts engaged in SITME activity. What procedures the firm did have were not properly implemented, so the firm failed to identify and respond to the red flags the accounts generated. As a result, it also failed to file suspicious activity reports (SARs).

FINRA Tackles J.P. Morgan Clearing on Short Position Failures

J.P. Morgan Clearing Corp. was censured and fined $195,000 by FINRA after the agency found that the firm reported an incorrect number of short interest positions and shares in dually listed foreign securities. It also failed to report short interest positions in dually listed foreign securities.

In addition, FINRA said the firm’s supervisory system did not provide for supervision reasonably designed to achieve compliance with respect to the FINRA rules regarding short interest reporting.

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