The top U.S. regulators of the securities industry are more aggressively penalizing trading firms whose lax financial crime compliance programs allow penny stock scams and ponzi schemes to fester, with a more concerted focus on rooting out recidivist behavior.
Both the Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (Finra) have issued penalties tied to brokerages failing to report suspicious and fraudulent activities in recent months. In other cases, authorities have brought criminal charges against individuals and firms actively duping investors – some with a long rap sheet, according to recent enforcement actions.
The SEC is chief federal regulator of the US securities industry. The Financial Industry Regulatory Authority (Finra), a self-regulatory body, is responsible for most anti-money laundering (AML) exams and related enforcement actions. The actions by these regulators also have tendrils snaking to financial institutions outside the brokerage space, as the fraudsters and sham trading firms inevitably move ill-gotten gains through bank accounts.
That reality puts more pressure on AML compliance teams at these institutions to know their securities clients and their business and trading structures – not an easy task with complex derivatives, options and other exotic, murky products in play.
Below are some recent key actions:
SEC goes after recidivist broker scofflaws in the penny stock arena, Ponzi-like purveyor
On Tuesday, the SEC charged two individuals in Florida and Georgia, along with two companies, with stealing nearly $3 million from dozens of investors located throughout the United States, claiming the companies they represented had valuable patents in the medical field that could lead to tens of millions of dollars in profits.
The SEC charged Rockey Hatfield, of Safety Harbor, Florida, Steve Lovern, of Atlanta, Belize-based N1 Technologies Inc., and Wyoming-based NanoSave Technologies Inc., in the scheme.
Hatfield is a “repeat offender whose prior securities schemes resulted in a criminal conviction, injunctions, a contempt of court finding, and broker-dealer, investment adviser, and penny-stock bars,” according to the complaint, referring to him as a “prolific recidivist offender.”
The SEC’s complaint alleges Hatfield controlled the two companies “but concealed his role in them by having his wife and Lovern named as corporate officers and directors,” a move to shield both securities regulators from his presence, but also make it harder for bank AML teams to uncover his illicit ties as institutions routinely screen for “negative news” on current and potential clients.
From at least January 2015 through May 2017, the scammers raised $2.5 million from at least 77 investors “offering and selling unregistered securities in the form of unit interests in several of N1 Belize and NanoSave’s purported patents, which were never registered with patent authorities.
In the scheme, the group “hired unregistered brokers to cold call investors and pitch investments in ‘patent units,’ using scripts written by Hatfield, including one that falsely claimed N1 Technologies had patented a cure for staph infections.”
To seal the deal, the boiler room callers told potential investors that purchasing an $80,000 unit “could yield as much as $1 million based on sales of similar patents.” Moreover, the SEC alleged that although investors were told that their money would help fund further research and development, the “defendants used most of it for personal expenditures and to pay sales commissions of up to 40 percent.”
On Thursday, the SEC charged Westchester, New York-based investment adviser Michael Scronic with losing $15 million in investor funds in a Ponzi-like scheme after lying about his assets and resume and then investing in a risky options trading strategy – that eventually backfired. At one point, when he told investors he had nearly $22 million in client funds, he really had less than $30,000.
The SEC also alleges that Scronic, getting desperate for new money, began identifying himself as an investment adviser to a fictitious hedge fund in which he purported to sell interests, or "shares." In all since 2010, he raised money from 42 different investors, mostly friends and members of his community. In the end, he gave a litany of excuses for why he couldn’t redeem the squandered funds.
“Scronic's alleged scheme is just another example of a so-called investment professional acting as fiduciary, but failing to deal honestly with his investors for his own financial benefit,” said Lara Mehraban, Associate Regional Director of the SEC's New York Regional Office, in a statement.
“Investors should be wary anytime they are promised high or consistently positive returns in a complex, hard to understand investment strategy.”
Questions for bank AML teams to help ferret out securities scammers:
·If a person says they are a broker or investment adviser, ask to view their applicable licenses
·Also ask if they have worked for prior firms so you can look up, on the broker side, their enforcement history with Finra in their Broker Check system.
·If a person seems to have little history in the broker field, and nothing in their enforcement history, ask for the names of husbands, wives and relatives, as the scammer might be using family to re-enter the sector.
·If a person has a license, ask to see what products the company will be selling to see if it makes sense. Also ask what returns the company is expecting to determine if that makes sense with current market momentum.
·If the person is hazy on details, or seems to have an overly complicated or murky investment product, press for more details to make sure the company is not a scam, including by querying actual proof of the value people would be investing.
·If the item supposedly being invested by a company is supposed to have a patent, ask for the patent numbers or check with the U.S. Patent Office to see if the broker, or company tied to the broker, has actually filed for said patents.
·For a broker dealer with any of these red flags – complex trading strategies or murky products – ask what other banks they had accounts, why they left and who was a point of contact at the prior institutions.
Finra goes after firms’ AML failures tied to penny stock transactions, omnibus, correspondent accounts
In its most recent monthly enforcement figures, covering actions taken or finalized in September, Finra also hit several firms for AML failings, in some cases also tied to issues around the buying and selling of risky penny stocks.
The regulator fined Clearwater, Fla.-based Spartan Securities Group, Ltd., $100,000 for failing to implement and AML program related to its business of accepting low-priced securities for deposit and liquidation, also referred to as “pump and dump” schemes.
In all, the firm “did not have a system to collectively analyze over time account opening documents, securities deposits, account transactions and public information in order to detect potentially suspicious patterns of activity,” according to Finra, leading to at least eight instances of missed suspicious activity.
As well, Spartan did not have a system “to look across different types of activity and sources of information to detect and investigate potentially suspicious activity or patterns of activity,” leading to scenarios where a customer could do things that were red flags in several areas, but the firm didn’t have the ability to put it all together, investigate the alert for file a suspicious activity report.
Finra also hit Los Angeles-based Electronic Transaction Clearing (ETC) with a $250,000 penalty for weak AML procedures, particularly tied to analyzing and screening what is coming in through omnibus accounts, a major challenge and focal point for securities firms. Finra stated that the firm had identified some 30 suspicious situations where sub-traders it had given direct market access had engaged in transactions seemingly without an economic purpose.
The company failed to investigate the actions for file a SAR, even in one case where Finra told the company it was investigating one of the firms it was dealing with for the same aberrant activity.
Finra also chastised ETC for failing to risk-assess sub entities it was giving market access that were foreign financial institutions working in a correspondent capacity – a major focal point for federal regulators and investigators in the banking sector currently, with some foreign banks recently getting penalized hundreds of millions of dollars for similar correspondent monitoring deficiencies. To read Finra’s full list of September enforcement actions, please click here.
Finra gets tough on local connection to foreign 1MDB fraud
In an action from last month, Finra banned a former Goldman Sachs banker linked to the massive $3 billion fraud of a Malaysian sovereign wealth fund after he refused to cooperate with a related investigation, according to the FCPA Blog.
In the action, Finra barred Tim Leissner, which he consented to, as one of eight individuals Singapore authorities accused of being facilitators of the looting of 1Malaysia Development Berhad, or 1MDB, one of the largest frauds ever.
To read ACFCS coverage of the fraud, and what compliance officers can learn and look out for, please click here.
Leissner allegedly abused his position as former chief of Goldman Sachs (Southeast Asia) to issue an unauthorized reference letter to a bank in Luxembourg in June 2015 using Goldman Sachs' letterhead, vouching for and endorsing Low Taek Jho, a central figure allegedly involved in 1MDB.
Leissner resigned in February 2016 with the Monetary Authority of Singapore in March of this year banning him for 10 years from any work in the sector. Finra’s Letter of Acceptance, Waiver and Consent with Leissner can be found here.