SEC Charges Firm with Not Snitching Enough

Thomas KlebestreifenRegular readers of this blog know that I resent when the government forces private industry to do the government’s job. Internal investigations are a good example. Companies spend millions conducting them into possible wrongdoing—hoping for leniency—and then turn over the results to their regulators to await punishment.

Along the same lines are Suspicious Activity Reports or SARs. Banks must file these reports when they see certain red flags of suspicious financial transactions. As shown by a recent SEC complaint, simply alerting the government that there may be an issue is not enough; the company must describe for the government exactly why the transaction is suspicious.

Funny. I thought investigating suspicious transactions was the government’s job.

What Are Suspicious Activity Reports?

The Bank Secrecy Act (BSA), and its regulations, require broker-dealers to file SARs to report certain suspicious activity conducted at or through their firms. You can take a look at them at 31 C.F.R. § 1023.320(a)(2). Section 17(a) of the Securities Exchange Act also requires broker-dealers to comply with the BSA.

Broker-dealers must file SARs with the U.S. Treasury Department’s Financial Crimes Enforcement Network or FinCEN. (This post needs an acronym key.)

Basically, the BSA requires a SAR when a transaction is $5000 or more and the broker-dealer has reason to suspect one of the following:

  • The transaction involves funds from illegal activity or that disguises funds from illegal activity
  • The transaction was designed to evade the BSA
  • The transaction had no apparent or lawful business purpose
  • The transaction involved the use of the broker-dealer to facilitate criminal activity.

Not only must the SAR form (a/k/a the “SAR-SF”) report the transaction itself, but it must complete the narrative section of the form to

provide a clear, complete and chronological description . . . of the activity, including what is unusual, irregular or suspicious about the transaction(s).

The Alpine Securities Complaint

The SEC recently sued a company called Alpine Securities Corporation in the Southern District of New York. In the complaint, the SEC alleges that Alpine’s practices relating to SARs were deficient.

Alpine is a clearing firm for many over-the-counter stock transactions. As the complaint alleges,

Since 2011, Alpine cleared thousands of deposits of microcap securities, most of them involving Scottsdale Capital Advisors Corporation as the introducing broker, and many of which were used as part of various stock manipulation and other schemes.

The complaint points out that Alpine has a history of FINRA disciplinary actions against it, including failure to maintain adequate written supervisory procedures. It also points out that Scottsdale was the subject of a FINRA enforcement action for filing deficient SARs. Finally, it alleges that “many Scottsdale and Alpine customers have been charged with violations of the federal securities laws, including violations related to transactions cleared through Alpine.”

Alpine’s Compliance Program and Its Implementation

Alpine is not one of those companies that didn’t have a compliance program. In fact, it had a program making clear that “it is important that Alpine, as well as all employees, remain diligent and active participants in Alpine’s anti-money laundering (AML) program” and that “Alpine will file suspicious activity reports (SARs) for transactions that may be indicative of money-laundering activity.”

Internal Alpine guidelines also defined certain red flags that suggest money-laundering and require filing a SAR For example, a SAR was necessary if the customer deposited penny stocks and then liquidates them. Or if the customer was the subject of news reports indicating possible criminal civil or regulatory violations. Or if the customer maintained multiple accounts or accounts in the names of family members or corporate entities for no apparent business purpose.

In the end, the complaint doesn’t take issue with Alpine’s written policies.

Instead, the complaint alleges that the compliance program “did not accurately reflect what the firm did in practice.”

The SEC had several problems with Alpine’s SARs reporting. It alleges that hundreds of SARs omitted material information that should have been reported. Some SARs purportedly did not identify the specific suspicious activity. Some SARs

systematically omitted other known material information in such a way that the SARs deprived law-enforcement, regulatory, and intelligence consumers, including the commission, a valuable and timely intelligence and undermine the very purpose for which BSA obligations are imposed on financial transactions.

According to the complaint, Alpine had two templates it used for SARs. The templates contained form language disclosing the client’s name and the details of the transaction (such as issuer, price and size of the transaction). Alpine apparently used those templates

Let’s be clear here: Alpine reported the suspicious transactions (for the most part). What it didn’t do was make the SEC’s job easy. It didn’t include enough detail about the red flags that caused Alpine to report the transaction. According to the SEC, Alpine’s practices did not comply with the BSA or FinCEN’s guidance.

SEC Says that Alpine Had Been Warned

Maybe if this was the first time Alpine had engages behavior, it would have received a slap on the wrist and gone home. In 2012, FINRA conducted an examination of Alpine related to its SARs narratives. FINRA apparently concluded that every SAR it reviewed during the examination failed to meet the legal requirements.

According to the complaint

Alpine took no meaningful steps to ensure that the deficiencies in the implementation of its BSA compliance program raised by FINRA were adequate adequately addressed. Instead, Alpine continued to rely on junior entry-level employees with little or no experience or training to draft SARs without adequate review of quality control from management.

Doing the Job of the Regulators

If Alpine wasn’t following the guidance and regulations, then I suppose the complaint is well-founded.

The problem I have is with the regulations themselves and what they require broker-dealers to do. They require broker-dealers not just to report suspicious transactions, but to tell the government exactly why it thinks the transactions are suspicious. Broker-dealers are tasked with doing FINRA’s work and becoming a snitch on their own clients. This places a heavy burden on financial institutions.

The other interesting part here is the fact that the SEC did not charge Alpine’s compliance officer (or whomever was in charge of compliance) in the lawsuit. If the problem here was that the compliance program wasn’t followed, shouldn’t someone’s head be on the stake?

This entry was posted in SEC Investigation, Securities fraud, Uncategorized. Bookmark the permalink.

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