SEC Settles Charges Against Brokerage Firms For Failing To Report Suspicious Sales Of Penny Stocks
Last week, the Securities and Exchange Commission announced 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.
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.”
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 anti-money laundering (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. Both firms consented to censures and, along with Basmagy, to cease and desist from similar violations in the future. Basmagy also agreed to industry and penny stock bars for a minimum of three years.
The SEC’s investigation was conducted in conjunction with a broader inquiry by FINRA into ICBCFS’s AML program and alleged financial, recordkeeping, and operational violations. FINRA today announced a related settled action against ICBCFS in which the firm agreed to pay a $5.3 million penalty and to retain an independent compliance consultant.
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