The Securities and Exchange Commission filed an administrative proceeding against Windsor Street Capital, L.P., a registered broker-dealer (formerly known as Meyers Associates, L.P.) for allegedly facilitating the unregistered sales of “hundreds of millions” of penny stock shares and failing to file with the Financial Crimes Enforcement Network so-called “suspicious activity reports” related to these transactions that involved at least US $24.8 million in proceeds. The SEC also named John Telfer, the firm’s former chief compliance officer and anti-money laundering officer, in its complaint for purportedly aiding and abetting Meyers Associates’ failure to file the required SARs. According to the SEC, from at least June 2013 through the present, Meyers Associates sold large quantities of shares of four penny stocks for two customers: Raymond Barton and William Goode. In connection with each stock, the two individuals allegedly represented that the stocks were lawfully exempt from SEC registration when they were not; however, Meyers Associates “accepted all of Barton and Goode’s representation at face value, without further inquiry,” said the SEC. The SEC claimed that Meyers Associates and Mr. Telfer failed to file SARs despite numerous red flags of suspicious activity including deposits of large blocks of stocks, liquidation of the stocks during periods of substantial favorable publicity regarding the securities, and transfer of the proceeds away from Meyers Associates. Some of the red flags were brought directly to Mr. Telfer’s attention by Meyers Associates’ clearing firm, claimed the SEC. The SEC seeks a cease and desist order and fines from Meyers Associates and Mr. Telfer, and disgorgement from the firm.
Compliance Weeds: Applicable law and FinCEN rules require broker-dealers and other covered financial institutions (banks, Commodity Futures Trading Commission-registered future commission merchants and introducing brokers, and SEC-registered mutual funds) to file a SAR with FinCEN in response to transactions or patterns of transactions involving at least US $5,000, which a covered entity “knows, suspects, or has reason to suspect” involve funds derived from illegal activity; have no business or apparent lawful purpose; are designed to evade applicable law; or utilize the institution for criminal activity. According to a recent FinCEN advisory, SARs may also be required to be filed for certain cyber events (click here for details). In 2014, the Financial Industry Regulatory Authority also fined Brown Brothers Harriman & Co. US $8 million for failing to file SARs in connection with similar activity involving penny stocks as alleged to be at issue in the Meyers Associates administrative proceeding. In Brown Brothers, FINRA also fined and suspended the firm’s global anti-money laundering compliance officer for his alleged role in the firm’s alleged misconduct. (Click here for details in the article “FINRA Says Brown Brothers Harriman Had an Unsatisfactory Anti-Money Laundering Program; Sanctions Firm and Former Global AML Compliance Officer,” in the February 10, 2014 edition of Bridging the Week.) More recently, Albert Fried & Company, LLC, an SEC-registered broker-dealer, agreed to pay a fine of US $300,000 to resolve charges by the SEC that, from August 2010 through October 2015, it failed to file SARs. According to the SEC, during this time on multiple occasions, Albert Fried received large-volume deposits of penny stocks from a number of customers. Afterwards, the customers sold the stocks in transactions that often constituted a “substantial portion” of the daily volume in the thinly traded securities. These liquidations, alleged the SEC, were often accompanied by other suspicious indicators. (Click here for further details in the article “Broker-Dealer Sanctioned by SEC for Anti-Money Laundering Breakdowns” in the June 5, 2016 edition of Bridging the Week.) Covered entities should continually monitor transactions they effectuate and ensure they maintain written procedures they follow to identify and evaluate red flags of suspicious activities and file required SARs with FinCEN when appropriate.