SEC Charges Broker-Dealer for Failing to File SARs

The SEC charged a broker-dealer for failing to file suspicious activity reports regarding OTC trades of low-priced securities. The SEC alleged that the trades constituted a "red flag" as defined in the broker-dealer's own procedures.

According to the Complaint filed in the U.S. District Court for the Southern District of New York, the SEC alleged that between about January 2018 and January 2020, the broker-dealer failed to follow its own written AML procedures by ignoring red flags triggered by transactions of over 30 billion shares of penny stocks. Among the red flags the broker-dealer's procedures identified, but failed to act upon, were the following:

• transactions with issuers with name changes or changing business lines;

• the presence of stock promotional activities during the liquidation period;

• unusual price fluctuations in the securities of the issuer;

• purchases of convertible debt followed closely by conversion of the date and release of the equities; and

• rapid withdrawal of sales proceeds following liquidation of securities.

The SEC charged the broker-dealer with violations of Exchange Act Rule 17a-8 ("Financial recordkeeping and reporting of currency and foreign transactions") and requested (i) permanent injunctive relief and (ii) civil monetary penalties.