SEC, Finra Hit Small Broker, Clearing Firm with $7.2 Mln in AML Settlements
The Securities and Exchange Commission on Wednesday announced settlements requiring small New York investment bank Chardan Capital Markets and its clearing firm to pay $1.9 million of penalties for failing to report suspicious trades from customers, while the Financial Industry Regulatory Authority hit the China-affiliated clearing firm with a fine of $5.3 million.
Chardan, which has less than 200 employees and specializes in small-cap banking deals, liquidated more than 12.5 billion penny stock shares for seven of its customers in 2013 and 2014 without filing required suspicious activity reports, according to the SEC settlement.
The Industrial and Commercial Bank of China Financial Services LLC similarly cleared the transactions without filing the reports, despite ultimately prohibiting some of the customers from trading in penny stocks, the SEC said.
The announcements highlight the importance regulators are putting on customer activities that suggest money-laundering at a time when SEC officials emphasize their need to deploy their limited resources to areas where enforcement will be most impactful.
The SEC also barred Chardan’s anti-money laundering officer Jerard Basmagy from the industry for at least three years and fined him $15,000.
The broker-dealer and clearing firms accepted the penalties without admitting or denying the regulators’ findings.
Chardan was accused of onboarding seven new customers beginning in late 2013 who routinely deposited and then promptly sold billions of shares of thinly-traded penny stocks, often in concurrence with promotions of the stock offerings, according to the SEC complaints. Further reflecting patterns that should have raised suspicions, the customers obtained their shares by converting debt of the microcap issuers and selling them “delivery versus payment/received versus payment” accounts at Chardan.
“The customers engaged in sales that regularly accounted for a substantial percentage of the daily volume in these thinly-traded penny stocks until the customer’s entire position was sold,” the SEC wrote.
Chardan agreed to pay the SEC a $1 million penalty, ICBCFS to pay $860,000, and Basmagy to pay $15,000. Finra separately announced on Wednesday its $5.3 million penalty against the bank-owned clearing firm along with a requirement that it retain an independent compliance consultant.