The SEC Wednesday charged a chief compliance officer and two broker dealers with failing to file Suspicious Activity Reports after red flags came up for the sale of 12.5 billion shares of penny stocks.
Jerard Basmagy, the CCO and anti-money laundering officer for New York-based Chardan Capital Markets LLC, was charged with willfully aiding and abetting and causing his firm’s AML violations.
Basmagy will pay the SEC a $15,000 penalty. He also agreed to be barred from the securities industry and the penny stock business for at least three years.
He settled without admitting or denying the SEC’s findings.
The SEC fined his employer, Chardan, $1 million for failing to report the suspicious stock sales.
It also penalized Industrial and Commercial Bank of China Financial Services LLC (ICBC Financial Services) $860,000.
ICBC Financial Services is a registered broker-dealer headquartered in New York. It is wholly-owned by China’s state-controlled Industrial and Commercial Bank of China Limited, headquartered in Beijing.
Both broker-dealers settled without admitting or denying the charges.
In a related action, Wall Street’s independent regulator, FINRA, fined (pdf) ICBC Financial Services $5.3 million and required the firm to retain a compliance consultant.
FINRA said the SEC raised red flags with ICBC Financial Services in June 2014 about potentially suspicious trading activity that the broker dealer hadn’t detected or reported.
“Despite this notice, [ICBC Financial Services] failed to make necessary changes to its AML program to adequately monitor this type of activity,” FINRA said.
ICBC Financial Services didn’t admit or deny FINRA’s findings.
The SEC and FINRA settled all of the enforcement actions through internal administrative orders and didn’t go to court.
According to the SEC’s complaint, Chardan, an introducing broker, liquidated more than 12.5 billion penny stock shares for seven of its customers from October 2013 to June 2014.
ICBC Financial Services cleared the transactions.
Both Chardan and ICBC Financial Services failed to file any SARs “even though the transactions raised red flags,” the SEC said.
The red flags included trading patterns and sales in issuers “who lacked revenues and products,” according to the SEC.
The SEC complaint against Basmagy said Chardan’s policies required its “then Chief Compliance Officer (“CCO”) and AML Officer, Basmagy, to investigate potential red flags, monitor trading for patterns of suspicious activity, and file SARs.”
The SEC said Chardan never conducted required reviews of significant penny stock liquidations that occurred through the seven customer accounts during the relevant period.
“By failing to file SARs as required, Basmagy, as Chardan’s then CCO and AML Officer, willfully aided and abetted and caused Chardan’s violations” of the securities laws, the SEC said.
Basmagy was Chardan’s CCO and designated AML Officer from around 2008 to early 2017.
The SEC’s May 16, 2018 administrative order against Jerard Basmagy is here (pdf).
FINRA’s order against Industrial and Commercial Bank of China Financial Services LLC is here (pdf).
Richard L. Cassin is the publisher and editor of the FCPA Blog.