SEC, FINRA Fine Brokerages With AML Violations: Enforcement

The Securities and Exchange Commission settled charges against broker-dealers Chardan Capital Markets LLC and Industrial and Commercial Bank of China Financial Services LLC (ICBCFS) for failing to report suspicious sales of billions of penny stock shares.

In a related action, the Financial Industry Regulatory Authority fined ICBCFS $5.3 million for systemic anti-money laundering compliance failures, including its failure to have a reasonable AML program in place to monitor and detect suspicious transactions, as well as other violations, including financial, recordkeeping and operational violations.

The SEC’s orders found that Chardan and ICBCFS violated the Exchange Act and an SEC financial recordkeeping and reporting rule and that Chardan’s AML officer, Jerard Basmagy, aided and abetted and caused the firm’s violations. The SEC also found that ICBCFS failed to produce documents promptly to SEC staff.  Without admitting or denying the SEC’s findings, the parties agreed to settlements requiring Chardan to pay a $1 million penalty, ICBCFS to pay $860,000, and Basmagy to pay $15,000.

Broker-dealers are required to file Suspicious Activity Reports (SARs) for transactions suspected to involve fraud or with no apparent lawful purpose. According to the SEC, from October 2013 to June 2014, Chardan, an introducing broker, liquidated more than 12.5 billion penny stock shares for seven of its customers and ICBCFS cleared the transactions.

Chardan failed to file any SARs even though the transactions raised red flags, including similar trading patterns and sales in issuers who lacked revenues and products. The SEC found that ICBCFS similarly failed to file any SARs for the transactions despite ultimately prohibiting trading in penny stocks by some of the seven customers.

“As gatekeepers to the securities markets, brokerage firms, including clearing firms, must take their anti-money laundering obligations seriously,” said Marc P. Berger, director of the SEC’s New York Regional Office. “The failure to file SARs in the face of numerous red flags is unacceptable.”

According to FINRA, ICBCFS failed to have in place a reasonably designed AML program to detect and cause the reporting of potentially suspicious transactions, particularly those involving penny stocks.

FINRA found that prior to June 2014, ICBCFS had no surveillance reports that monitored potentially suspicious penny stock liquidations, and did not require its employees to document their review of the surveillance reports it did have in place.

FINRA further found that ICBCFS lacked systems and procedures to monitor whether certain business activities were unusual for any given customer, despite the firm’s written AML procedures specifically identifying such items as red flags requiring monitoring.

Susan Schroeder, FINRA executive vice president for the Department of Enforcement, said, “Member firms are obligated to implement an AML program that is reasonably designed to address the unique money laundering risks posed by their business.  Firms that engage in high-risk activities such as penny stock clearing are the gatekeepers to the market and must establish a reasonable supervisory system to detect and report suspicious trading activity.”

SEC Charges California Investment Advisor in Multimillion-Dollar Fraud

Investment advisor William Jordan of Orange County, California, has settled charges with the SEC for perpetrating a multimillion-dollar fraud on his clients.

The SEC’s complaint alleges that, from 2011 until 2016, as he raised more than $71 million from approximately 100 advisory clients, Jordan lied to investors about how their funds would be invested, about their investments’ performance, and about his own disciplinary history.

Jordan is alleged to have overstated the value of the assets in several of his 16 private investment funds, and then to have used those inflated values and unrealized “profits” on other investments to overpay management fees and bonuses to himself and his entities.

The complaint further alleges that the 16 funds were never audited, despite Jordan’s promises to investors. The open funds, along with other Jordan-affiliated entities, sought bankruptcy protection in May 2017 and are under the control of an independent chief restructuring officer.

The appropriate amount of disgorgement, prejudgment interest and civil penalties will be determined by the federal district court in Orange County.

Rep, Advisor Indicted for Scheme to Defraud Investors

Leon Vaccarelli, a defendant in an ongoing SEC litigation, was indicted on multiple counts of mail fraud, wire fraud and money laundering in connection with a scheme to defraud investors by representing that he would invest their money in various investment opportunities. Instead, he used the money to pay his own business and personal expenses.

The criminal charges against Vaccarelli alleged in the indictment arise from the same conduct alleged in the SEC’s complaint against Vaccarelli, individually and doing business as Lux Financial Services, and his company, LWLVACC LLC, filed in federal court in Connecticut on Aug. 31, 2017.

According to the SEC’s complaint, Vaccarelli fraudulently persuaded several elderly customers to invest with him. Instead of investing the customers’ money in such things as conventional brokerage accounts and so-called separately managed accounts as promised, Vaccarelli allegedly deposited customer funds into his personal and business bank accounts.

He allegedly commingled the funds with his own money and used them for his own purposes, and in some instances he used customer funds to pay returns to earlier investors.

According to the SEC’s complaint, Vaccarelli asked one customer to sign an agreement that she would not provide certain information to FINRA or the SEC. Vaccarelli also allegedly sold more than $450,000 in securities that were held in trust for the care and maintenance of a beneficiary and used some of the proceeds to pay business and personal expenses.