Results tagged “AWC” from Securities Industry Lawyer Blog

May 8, 2013

FINRA Identifies "Red Flags" for AML Compliance

FINRA recently entered into a settlement with Gar Wood Securities LLC (the "AWC") concerning allegations that Gar Wood facilitated the sale of restricted securities in violation of the Section 5 of the 1933 Act, and the Firm failed to identify "suspicious" activity in a customer's account that should have warranted the filing of a Form SAR-SF.

The customer, identified as ICG, was apparently in business of issuing loans secured by low-priced stock. Over a two-year period, ICG supposedly deposited penny stocks into its Gar Wood brokerage account and immediately liquidated the positions and wire transferred the proceeds.

ICG's activity caught the attention of FINRA, which identified the following "red flags" that Gar Wood apparently failed to act upon:

• ICG opened a new account and delivered physical certificates representing a large block of thinly traded or low priced securities;

• ICG had a pattern of depositing physical share certificates, immediately
selling the shares and then wiring out the proceeds of the sale;

• ICG deposited share certificates that were recently issued or represented a
large percentage of the float for the security;

• The lack of a restrictive legend on deposited shares seemed inconsistent
with the date the customer acquired the securities or the nature of the transaction
in which the securities were acquired;

• ICG had limited assets but received an electronic transfer or journal
transaction of large amounts of low priced unlisted securities;

• Issuers' SEC filings were not current, were incomplete or nonexistent; and
" Some of the company stocks deposited and sold in the ICG account
involved shell companies that issued shares; and

• JP Morgan, the original clearing firm for the ICG account, closed the ICG
account after JP Morgan identified several red flags related to ICG's operations.

The AWC is worthwhile reading for attorneys who counsel broker-dealers on anti-money laundering compliance.

October 23, 2012

FINRA Provides Guidance for Supervisory Review of Email

FINRA recently released an Acceptance, Waiver and Consent signed by Deutsche Bank Securities, Inc. (FINRA Matter No. 2010023096302). The AWC is instructive because it speaks to supervisory review of electronic correspondence and should be considered by broker-dealers when crafting a lexicon-based search system for electronic correspondence.

Background Facts

Depositphotos_11071264_M.jpgDeutsche Bank's Private Client Services division has 16 offices with approximately 240 registered representatives. Deutsche Bank's Boston office employed a registered representative who engaged in questionable conduct, including: borrowing $220,000 from a customer, issuing personal checks totaling $860,000 which were returned for insufficient funds, failing to repay the customer loan in full, failing to obtain Firm approval to borrow from a customer, and charging personal expenses to a corporate credit card.

Clearly, Deutsche Bank had a problem broker on its hands and FINRA asserted that Deutsche Bank was on notice of the employee's financial troubles though various "red flags", including: charging personal expenses to a corporate credit card, bouncing 2 checks to a credit card company, and bouncing a personal check to a co-worker.


FINRA treated Deutsche Bank with a heavy hand by issuing a censure, assessing a fine in the amount of $100,000, and forcing undertakings which include a revision to Deutsche Bank's system of supervision as it relates to supervisory review of electronic correspondence.

Takeaway Lesson

As is commonplace in the securities industry, Deutsche Bank employed a lexicon-based search system to flag electronic correspondence for supervisory review. The supervisory system was required to comport with NASD Rule 3010(d), which requires that: "Each member shall develop written procedures that are appropriate to its business, size, structure, and customers for the review of incoming and outgoing written (i.e., non-electronic) and electronic correspondence with the public relating to its investment banking or securities business, including procedures to review incoming, written correspondence directed to registered representatives and related to the member's investment banking or securities business to properly identify and handle customer complaints and to ensure that customer funds and securities are handled in accordance with firm procedures."

The AWC chastised Deutsche Bank's system of supervision by stating that:

"The lexicon, however, failed to include any search terms to detect communications concerning loans, liens, personal bankruptcies, delinquent payments, bounced checks or other indications that a registered representative might be experiencing financial difficulties and/or violating certain applicable laws, regulations and rules. As a result of DBSPs failure to include such search terms in the lexicon, the Firm did not review numerous MJ e-mails that contained evidence of red flags regarding his misconduct."

Had Deutsche Bank's lexicon-based system included the search terms noted by FINRA, it is claimed that Deutsche Bank would have become aware of various emails which underscored the registered representative's financial pressures.

The upshot of this AWC is clear: If you employ a registered representative under financial duress, your supervisory system for communications must be tailored to ensure supervisory review of potentially problematic emails. Given the inherent costs associated with additional layers of supervisory review, it begs the question of whether the cost is justified by the producer's revenue. Odds are it isn't because financial pressures often flow from a lack of production. As FINRA noted in the AWC, the broker "was generating little revenue of the Firm."

The AWC also suggests that FINRA will take issue with any lexicon-based system which does not adequately root out emails concerning matters which may lead to a disclosure item on a Form U4.