Burt Martin Arnold Securities, Inc., a small Los Angeles-based broker-dealer, was sanctioned by the Financial Industry Regulatory Authority in connection with its sale of securities from May 2009 and to May 2010 that were not registered or exempt under applicable law. During that period, 14 customers deposited with BMA and then sold 71 million shares of a “thinly traded” stock of an unnamed “speculative issuer.” This amount constituted approximately 60% of the company’s shares as of November 2009. Although BMA required the customers to complete questionnaires to assess their securities’ eligibility for a registration exemption, the “explanations and the transactions were not adequately investigated to determine the basis for the repeated issuance of large blocks of stock,” said FINRA. As a result, FINRA alleged that BMA did not have adequate supervisory systems, and additionally charged that the firm did not maintain an adequate anti-money laundering and customer identification program. FINRA claimed that the customers’ activity in the relevant security was suspicious activity that should have been reported to the Financial Crime Enforcement Network as part of its AML program. BMA settled FINRA’s charges by payment of a US $325,000 fine and agreement to retain an independent consultant to review its AML program and handling of low-priced securities, among other matters.
My View: With increasing regularity, FINRA appears to be coupling allegations of substantive violations – as in this matter – with violations based on anti-money laundering theories. (Click here to see another example in the article “Merrill Lynch Fined US $6 Million by FINRA for Reg SHO Violations and Supervisory Lapses" in the October 27 to 31 and November 3 edition of Bridging the Week.) This approach reminds me of the US Supreme Court arguments just a few weeks ago on whether a federal law meant to improve corporate governance (Sarbanes-Oxley Act) could be applied to a commercial fisherman accused of destroying evidence that he caught undersized fish. Many of the justices expressed skepticism that Congress intended this outcome, with one suggesting that if they did, Congress should have considered renaming the statute, the “Sarbanes-Oxley Grouper Act.” Just because there is an arguable basis to bring enforcement actions under one law or set of regulations, albeit tangential, it is not clear how this serves the public interest, when actions can be based on other laws and regulations that appear more logically associated.