Securities Industry Commentator by Bill Singer Esq

May 18, 2018

Does BrokerCheck Do More Harm Than Good? (Financial Advisor IQ)
Many broker-dealers have voiced the opinion that because even unfounded customer or employer complaints can be included in BrokerCheck records, they can indeed be more harmful than helpful. But Finra believes BrokerCheck's potential to save investors from unscrupulous broker-dealers more than makes up for any broker-dealer having a false claim listed in their record.

SEC Moves Quickly To Shut Down Fake Pre-IPO Share Scam (SEC Litigation Release No. 24144)
The SEC filed a Complaint in the United States District Court for the Central District of California allleging that Keenan Gracey with the fraudulent sale of purported pre-IPO shares in Perspecta, Inc., a new company that will be formed as a result of the merger of three other companies. The Complaint alleges that Gracey used publicly available information about the merger and false claims about his supposed connections with the companies to tout 60 time returns. The SEC obtained n asset freeze and a temporary restraining order to halt the offering. READ the FULL TEXT Complaint

FINRA Stretches Definition Of Participating In A Private Securities Transaction ( Blog)
What's a lot? What's reasonable? How many times is frequently? When is enough, enough? What does it mean to participate? These and other mysteries of the Universe keep publisher Bill Singer awake through the night and into the early morning. You are able to sleep soundly because of the unselfish efforts of folks like Bill who man the ramparts of philosophical thought and aimless rumination. In today's blog, Bill has tanked up on coffee after spending staying awake to ponder whether hand delivering a check rises to the level of participating in a private securities transaction. Bill is also wondering how his New York Mets started off with 11 wins and 1 loss and now have a record of 20 wins and 19 losses.

In response to the filing of a Complaint on May 8, 2018, by the Financial Industry Regulatory Authority's ("FINRA's") Department of Enforcement, Respondent Francisco Jose Ortiz submitted an Offer of Settlement dated May 14, 2018, which the regulator accepted.  Under the terms of the Offer of Settlement, without admitting or denying the allegations in the Complaint, Respondent  Francisco Jose Ortiz consented to the entry of findings and violations and to the imposition of the sanctions. FINRA Department of Enforcement, Complainant, vs Francisco Jose Ortiz, Respondent (Order Accepting Offer of Settlement, FINRA Office of Hearing Officers, May 14, 2018) (the "Order").
In accordance with the terms of the Order, FINRA imposed a $5,000 fine and a one-month suspension from association with any FINRA member in all capacities. As set forth in the "Summary" section of the FINRA Order:

In May 2015, Francisco Jose Ortiz processed a customer wire transfer based on email instructions despite knowing that an unknown imposter had compromised the customer's email account and that the wire request was fraudulent. In order to process the wire transfer, Ortiz falsely represented on a Wells Fargo Advisors LLC ("WFA") wire transfer request form that the request had been orally confirmed with the customer causing WFA's books and records to be inaccurate.

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, the Industrial and Commercial Bank of China Financial Services LLC, ("ICBCFS")submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Industrial and Commercial Bank of China Financial Services LLC, Respondent (AWC  2015045550801, May 16, 2018).
In accordance with the terms of the AWC, FINRA imposed upon ICBCFS a Censure, a$5,300,000 fine; and the firm agreed to various undertakings involving the retention of an Independent Compliance Consultant. 
As set forth in the "Overview" section of FINRA's AWC:

In late 2012, ICBCFS started a new business line involving the clearance and settlement of equity transactions. In connection with this new business, the Firm began carrying and clearing for dozens of new correspondent broker-dealers, including thousands of new introduced customers. Many of these new introduced customers began purchasing and selling millions of dollars' worth of low-priced equity securities ("penny stocks") within a few months after the business was launched. 

From January 2013 through at least September 2015 (the "Relevant Period"), ICBCFS's anti-money laundering ("AML") program was not reasonably designed to detect and cause the reporting of potentially suspicious transactions with respect to this new business line. Despite clearing and settling the liquidation of more than 33 billion shares of penny stocks, ICBCFS did not have in place procedures reasonably designed to ensure that penny stock transactions were sufficiently scrutinized for potentially suspicious activity. 

Prior to June 2014, the Firm had no surveillance reports designed to monitor potentially suspicious liquidations of penny stock shares. As for the exception reports that the Firm did have in place, ICBCFS's AML procedures did not require its employees to document their review of such reports and the Firm did not track instances in which potentially suspicious trading activity was identified. After being placed on notice in or about June 2014 by the U.S. Securities and Exchange Commission ("SEC") that its surveillance system failed to detect potentially suspicious penny stock liquidations by introduced customers, ICBCFS did not amend its AML program to adequately monitor this activity. Although the Firm implemented two new surveillance reports that targeted penny stock transactions, ICBCFS failed to amend its written AML procedures to provide guidance to its employees regarding the purpose of the reports, how to use the reports and how to escalate matters of concern to Firm senior management for further review. Moreover, ICBCFS did not require its employees to document either their review of the new Firm-issued surveillance reports or escalations to senior management of issues of concern. Because of these deficiencies, ICBCFS did not track patterns of potentially suspicious trading activity over extended periods of time.

As a result of these deficiencies in its AML program, ICBCFS failed to reasonably detect and investigate red flags of potentially suspicious penny stock liquidations that may have required the filing of a suspicious activity report ("SAR"), despite clearing the liquidation of over 33 billion penny stock shares valued in excess of $210 million during the Relevant Period. By failing to develop and implement an AML program that was reasonably designed to detect and report suspicious activity, the Firm violated FINRA Rules 3310(a) and 2010. 

ICBCFS also failed to conduct appropriate AML independent testing that addressed the primary AML risks associated with the Firm's clearing of penny stock transactions, in violation of FINRA Rules 3310(c) and 2010. 

In addition to the AML-related violations, ICBCFS had customer reserve hindsight deficiencies, in violation of Section 15(c) of the Securities Exchange Act of 1934 (the "Exchange Act"), Rule 15c3-3(e) thereunder, and FINRA Rule 2010. The Firm also performed inaccurate customer reserve formula computations, in violation of Section 17(a) of the Exchange Act, Rule 17a-4(b)(5) thereunder, and FINRA Rules 4511(a) and 2010. 

The Firm also performed inaccurate segregation calculations and committed possession or control violations, in violation of Section 15(c) of the Exchange Act, Rule 15c3-3 thereunder, and FINRA Rule 2010, and improperly used three foreign custody accounts without first requesting the SEC to designate the custodial accounts as good control locations, in violation of Section 15(c) of the Exchange Act, Rule 15c3-3(c)(4) thereunder, and FINRA Rule 2010. Furthermore, the Firm filed three inaccurate FOCUS Reports, in violation of Section 17(a) of the Exchange Act, Rule 17a-5(a)(2) thereunder, and FINRA Rule 2010, and employed an individual who worked as a Financial and Operations Limited Principal but who lacked the appropriate license, in violation of NASD Rule 1021(a) and FINRA Rule 2010. 

Finally, the Firm's supervisory system and written procedures governing compliance with the possession or control provisions of Section 15(c) of the Exchange Act and Rule 15c3-3 thereunder were not reasonably designed, in violation of NASD Rule 3010(a) and (b) and FINRA Rules 3110(a) and (b) and 2010. 

Arizona Men Charged In Manhattan Federal Court With $23 Million Fraud And Money Laundering Scheme In Connection With Purported Fundraising For Numerous Scam Political Action Committees (DOJ Press Release)
William Tierney a/k/a "Bill Johnson," and Robert Tierney were each charged in a complaint filed in the United States District Court for the Southern District of New York with one count of wire fraud conspiracy; mail fraud conspiracy; conspiracy to commit money laundering; and conspiracy to engage in monetary transactions in property derived from specified unlawful activity in connection with their alleged fraud of tens of thousands of donors to at least nine political action committees that they controlled, operated, and influenced and for which they raised over $23 million between 2014 and 2017, and more than $50 million in the past 10 years. Prosecutors allege that virtually all of the funds raised was either paid to the scheme participants or used to perpetuate the fraud through additional telemarketing, fundraising, and overhead expenditures.  READ the FULL TEXT Complaint