Securities Industry Commentator by Bill Singer Esq

August 11, 2020

Disbarred Beverly Hills Lawyer Pleads Guilty to Federal Charge that He Embezzled His Client's Money and Used It to Pay Off Debt (DOJ Release)

SEC Charges Interactive Brokers With Repeatedly Failing to File Suspicious Activity Reports / Firm Will Pay a Total of $38 Million in Penalties to Settle With Regulators (SEC Release)

FINRA Fines Interactive Brokers $15 Million for Widespread AML Failures (FINRA Release)

Last Friday I received an email titled: "Notice of Class Action Settlement re Google Plus - Your Rights May Be Affected," and learned that I had, indeed, hit the jackpot! As one of the few, not-so proud owners of a Google Plus account during the relevant period of 2015 to 2019, I had been awarded $7.5 million in damages. As best I understand from the email, on "June 10, 2020, the Honorable Edward J. Davila of the U.S. District Court for the Northern District of California, granted preliminary approval" of some class action settlement. Wow!! I may well have used my Google Plus account nearly as many times as the multiplicity of fingers on my right hand!!! That's some damn pay-off for that usage.

As best I can tell, there were likely dozens of Google Plus accounts (or, you know, maybe only a dozen or, like, maybe up to but not equaling two dozen accounts). In last Friday's email, the legal mumbo-jumbo seems to be claiming that up to 500,000 Google Plus users had their personal data exposed via a software bug. Now, mind you, I'm a bit skeptical here because I'm not believing that some 499,999 idiots other than me used Google Plus but, hey, I'm certainly more than happy to accept my $7.5 million settlement. I'd tell you that I was very, very sorry to learn of the shutdown of Google Plus in 2019 but, frankly, I didn't even know it wasn't up and running until I read somewhere that, well, you know, it wasn't up and running. 

Things have been rough the past few months, what with COVID and all, but this is certainly going to turn the year around for me. If my wife had listened to me, which she never does, we would have had two Google Plus accounts, and, if she had listened to me which, as noted previously, she never does, we would have been awarded $15 million in settlements. Sigh -- we'll just have to make do with my paltry $7.5 million. I'm just about ready to send out my claim for my massive award along with proof of my usage of the social media account and . . . what?  Oh damn, what the hell is this:

If sufficient funds remain after calculation of the aggregate initial maximum distribution of US$5.00 per Claimant, the allocation shall be recalculated on a pro rata basis up to a maximum distribution of up to US$12.00 per Claimant. For clarity, the maximum Settlement Payment to be made to any single Claimant shall not exceed US$12.00.

Robinhood reports more monthly trades than rivals Charles Schwab, E-Trade combined (CNBC by Kate Rooney)
As reported in part by CNBC's Rooney:

Robinhood saw 4.3 million daily average revenue trades, or DARTS, in June, the company told CNBC Monday. This is the first time the start-up has shared monthly totals. Robinhood's debut total was higher than all of the major incumbent brokerage firms, and more than E-Trade and Charles Schwab combined. 

TD Ameritrade saw the next highest monthly total at 3.84 million DARTs, according to the company's monthly report. Interactive Brokers saw 1.8 million DARTs in June, followed by Charles Schwab and E-Trade at 1.8 million and 1.1 million, respectively.
Disbarred lawyer Alan F. Broidy, 65, pled guilty to an Information filed in the United States District Office for the Central District of California charging him with one count of interstate transportation of stolen property. As alleged in part in the DOJ Release:

[B]roidy was hired to represent GRL-Mesa Investments LLC, a Phoenix-based company that filed for Chapter 11 protection in United States Bankruptcy Court in Los Angeles in December 2015.

In August 2016, the bankruptcy case was resolved and dismissed. Broidy was directed by the court to hold $2,469,926 in a client trust account - funds derived from the sale of assets belonging to GRL-Mesa's bankruptcy estate. This money was supposed to be distributed to Mesa's creditors.

Although he transferred a total of $1,937,400 of Mesa's funds to its creditors, including $975 owed to the United States Trustee, Broidy did not return the remaining $512,526 that belonged to Mesa. Instead, he stole it and used it to pay for personal expenses.

Broidy admitted that on August 16, 2016, without his client's knowledge or consent, he deposited $100,000 of Mesa's money into his personal bank account, and then transferred $75,000 of that money to the bank account in New York of one of Broidy's own creditors. Through these unauthorized transfers that were hidden from Mesa, Broidy arranged to pay one of his own expenses with Mesa's money.

In July 2019, the State Bar of California disbarred Broidy based on the facts involved in this case.
Famed rock 'n roll litigator Bob Dylan offers a fabulous course on civil procedure. In one of his most popular lectures, lawyer Dylan explains that you're gonna have to serve somebody, yes, indeed you're gonna have to serve somebody, well, it may be the devil or it may be the Lord, but, you're gonna have to serve somebody. Of course the way Dylan delivers his lesson is a lot more catchy than drab prose, plus his method has a beat and you can dance to it. In a recent Petition to the United States District Court for the Southern District of New York, we come across the plight of a former employee seeking to vacate an arbitration award. In order to stand before the folks in the robes, the employee needed to serve somebody. He did. Well, technically he did. Well, maybe not technically but he did give it the old college try. 


Without admitting or denying the findings in an SEC Order SEC's findings, Interactive Brokers LLC agreed to findings that the firm had violated the financial recordkeeping and reporting provisions of the federal securities laws and a related SEC rule. Interactive Brokers agreed to be censured, to cease and desist, and to pay an $11.5 million penalty. In parallel actions, the Financial Industry Regulatory Authority (FINRA) and the Commodity Futures Trading Commission (CFTC) penalties of $15 million and $11.5 million, respectively, were imposed, for a total of $38 million in penalties paid to the three agencies. As alleged in part in the SEC Release:

[O]ver a one-year period, Interactive Brokers failed to file more than 150 SARs to flag potential manipulation of microcap securities in its customers' account, some of the trading accounting for a significant portion of the daily volume in certain of the microcap issuers. The order finds that Interactive Brokers failed to recognize red flags concerning these transactions, failed to properly investigate suspicious activity as required by its written supervisory procedures, and failed to file SARs in a timely fashion even when suspicious transactions were flagged by compliance personnel.

The CFTC filed and simultaneously settled charges against Interactive Brokers, and pursuant to CFTC Order, the registered futures commission merchant ("FCM") to pay an $11.5 civil monetary penalty and a $706,214 disgorgement. Also Interactive Brokers undetakes in part to hire a third party compliance consultant to review and report on the AML and supervisory issues raised in the order. This case purportedly marks the first CFTC enforcement action charging a violation of Regulation 42.2, which requires registrants to comply with the Bank Secrecy Act. As alleged in part in the CFTC Release:

[F]rom June 2014 through November 2018, Interactive Brokers failed to ensure that its employees followed established policies and procedures with respect to supervision of customer accounts. Interactive Brokers also lacked a reasonably designed process for conducting investigations of account activity and making SAR determinations. These failings contributed to its inability to maintain an adequate AML program. As a result, Interactive Brokers employees failed to adequately investigate and identify certain signs of suspicious activity in accounts that, according to its own compliance procedures, should have prompted the filing of SARs with appropriate authorities.

While Interactive Brokers maintained basic written policies, it failed to commit adequate resources to ensure that its AML program was reasonably equipped to monitor, detect, escalate, and report suspicious activity in practice. Interactive Brokers also had no mechanism to combine information generated by various reports to identify patterns and trends over time. Given the size and nature of Interactive Brokers' business, the lack of these procedures limited the ability of its analysts to recognize the full scope of an individual customer's activity. This resulted in the company overlooking red flags that indicated potentially suspicious activity. Additionally, Interactive Brokers did not put any procedures in place that required compliance personnel to document steps taken and decisions made during the investigative and SAR consideration process. As a result of all of these deficiencies, Interactive Brokers failed in its duty to detect and report instances of suspicious activity.

The order states that Interactive Brokers represented in its settlement offer that it has since engaged in substantial remedial measures, including the engagement of outside consultants to conduct various assessments, independent testing of its AML program, and the development and ongoing implementation of a new case management system. Interactive Brokers has also continued to retain an independent consultant to report on the status of its implementation of previously-made recommendations and to make any additional proposals for improvements in internal controls, policies, procedures, systems, and training.

Without admitting or denying the charges in a FINRA AWC, Interactive Brokers agreed to FINRA's imposition of a $15 million fine and undertakes to certify that it will implement the recommendations of a third-party consultant to remedy the firm's AML program failures. As set forth in the "Summary" portion of the FINRA AWC:

This matter concerns registered broker-dealer IB's failure to file suspicious activity reports ("SARs") as required by Section 17(a) of the Exchange Act and Rule 17a-8 thereunder. A registered broker-dealer is required to file a SAR when it knows, suspects, or has reason to suspect that certain transactions (1) involve funds derived from illegal activity, (2) involve the use of the broker-dealer to facilitate criminal activity, (3) are designed to evade any requirement of the Bank Secrecy Act ("BSA"), or (4) have no business or apparent lawful purpose. From at least July 1, 2016 to June 30, 2017 (the "relevant period"), IB failed to file SARs relating to suspicious activity involving certain U.S. microcap securities2 transactions it executed on behalf of its customers. 

During the relevant period, IB ignored or failed to recognize numerous red flags, failed to properly investigate certain conduct as required by its written supervisory procedures, and ultimately failed to file SARs on suspicious activity. In a number of instances, IB's customers deposited a large block of U.S. microcap securities, sold the securities into the market, and shortly thereafter withdrew the proceeds of these sales from its accounts. In other instances, the sales by IB's customer accounted for a significant portion of the daily trading volume in certain U.S. microcap securities issuers. In addition, IB failed to review at least 14 deposits of U.S. microcap securities where the security had been the subject of a Commission trading suspension. In connection with this activity, IB failed to identify red flags and, therefore, did not report this activity via SARs. In those few instances where IB personnel identified red flags concerning U.S. microcap securities trading activity during the relevant period, IB failed to file a SAR where one should have been filed. These failures were the result of IB's failure to implement a reasonable surveillance program despite the significant size of IB's U.S. microcap securities business. 

As asserted in part in the FINRA Release:


In determining the appropriate sanctions in this matter, FINRA considered, among other factors, that during the course of this investigation Interactive Brokers took proactive steps, invested substantial resources, and began taking meaningful steps, to remediate its AML program. The Firm has developed and implemented new, automated surveillance reports, and a new case management system that improves the type and amount of information available to its analysts. The Firm also has hired many dozens of AML-dedicated staff, including senior personnel with regulatory and law-enforcement backgrounds. The Firm has engaged a number of consultants, including a third-party outside consultant (the "Third-Party Consultant") to conduct a nonprivileged review of its AML processes and systems. The Third-Party Consultant has provided recommendations concerning the Firm's AML program, which Interactive Brokers has adopted and is implementing. Additionally, Interactive Brokers has retained third-party vendors to assess the AML risks posed by the Firm's business and to conduct third-party testing of the Firm's AML program. 

Accordingly, the sanctions imposed on Interactive Brokers by this AWC reflect FINRA's consideration of these factors, and FINRA's determination that the Third-Party Consultant is qualified and not unacceptable to FINRA. 

Finally, Interactive Brokers attached the following "Statement of Corrective Action" to its AWC: 

Interactive Brokers LLC ("IB") submits this Statement of Corrective Action in connection with the foregoing Letter of Acceptance, Waiver, and Consent ("AWC") describing the steps it has already taken to correct and substantially reduce the risk of recurrence of the issues addressed by the AWC. As set forth in detail below, IB has invested significant resources to enhance its AML program, and those efforts continue to this day. 

Independent Consultants. IB has retained several experienced and well-respected consultants and advisors to assist the firm in improving its AML program. In 2018 IB retained Consultant I to conduct a comprehensive review of IB's AML program and identify areas of focus and improvement for IB's AML program going forward. IB has accepted all of Consultant I's recommendations and is in the process of implementing them. IB has also retained Consultant II to conduct assurance work following IB's implementation of the recommendations resulting from Consultant I's review. IB retained a third consultant to draft a risk appetite statement and conduct a formal AML risk assessment, and IB has retained an independent firm to conduct its 2019 independent testing of the AML program. 

Hiring and reorganization of AML function. IB hired new leadership and increased headcount in its AML function. Since the beginning of 2018, the firm has added approximately 80 permanent personnel to its AML and surveillance team (in addition to approximately 35 temporary staff), including many with significant industry and AML experience: 
    • Chief AML Officer (the function was formerly consolidated with the Chief Compliance Officer) with more than 15 years of relevant experience, including building the Customer Identification Program for a major commercial bank and serving as an AML team lead at another major bank; 
    • Deputy AML Officer who has been a practicing attorney for fourteen years with four years serving in legal and compliance roles at Nadex, NYSE, and FINRA; 
    • Head of Sanctions; 
    • Head of Enhanced Due Diligence; 
    • Head of Quality Assurance and Training; 
    • Head of Financial Intelligence Unit; 
    • Head of AML QA; 
    • Dedicated AML and Sanctions Counsel; 
    • Approximately 10 Team Leads (some were promoted from the analyst ranks); 
    • And dozens of Compliance Analysts. 
IB also reorganized its AML program to improve its efficiency and effectiveness. Each AML unit-a QA and Training unit, a Financial Intelligence unit, a Know Your Customer ("KYC")/Enhanced Due Diligence ("EDD") unit, a Sanctions and Lists Screening unit, and an AML Risk Assessments unit-now reports to the Chief AML Officer. The Trade Surveillance unit, which reports to the Deputy Chief Regulatory Officer, also reports to the Chief AML Officer for AML purposes. 

New Case Management System and Surveillance. IB has developed and is building a customized proprietary case management system, IBKR 360, which allows compliance analysts a holistic view of customer information and activity when they conduct surveillance. The firm has enhanced many of its exception-based surveillance reports and report parameters and is migrating them to IBKR 360. IB LLC retained outside AML consultants to enhance the firm's existing cashiering surveillance reports to address potentially suspicious cashiering typologies. The consultants designed additional report parameters and tuned existing parameters based on their analysis of IB customer data, and IB is in the process of programming and testing the enhancements designed by the consultants. 

Policies and Training. IB has adopted a new AML policy, completing a risk assessment and risk appetite statement, and developing desktop procedures within each AML team to maintain uniformity in procedure and analysis. These desktop procedures will provide detail on day to day operations aligned with specific tasks, such as conducting investigations and reviewing specific reports. The firm enhanced its standard employee AML training and developed material for additional training of AML and Surveillance Analysts on SAR-filing and AML "red flags." Surveillance Analysts and key New Accounts staff of the firm are becoming CAMS (Certified Anti-Money Laundering Specialist) certified. 

Governance. Various committee and working groups meet regularly to monitor IB's progress in achieving its goals and to discuss ongoing, future enhancements. These groups include the following: 
    • AML Advisory Committee - the AML Advisory Committee is comprised of the Chief AML Officer, the Chief Executive Officer, the Chief Financial Officer, the Chief Regulatory Officer, the Deputy Chief Regulatory Officer, the General Counsel, the Global Head of New Accounts, and other in-house counsel. During the quarterly meetings, the Chief AML Officer provides metrics on the AML program and notifies its members of progress made in IB's focus areas for improvement. This committee also discusses regulatory findings and progress made in addressing regulatory matters.
    • Account Opening Working Group - the Account Opening Working Group consists of the Chief AML Officer, the Head of New Accounts, and several AML and sales related inhouse counsel (as well as members of senior management). This working group meets weekly and makes recommendations as to the acceptance or rejection of any correspondent accounts for foreign financial institutions or other complex clients with material negative news or on which the Head of New Accounts would like further guidance. In addition, the working group discusses potential issues related to AML, potential customer processing, appropriate licensing, and customer risks. 
    • Data Integrity Working Group - the Data Integrity Working Group is composed of the Chief Data Officer, the Chief Regulatory Officer, and the heads of the major programming groups and meets every other week. This working group discusses issues identified related to the inputs into IB's new AML case management system, IBKR 360, and the surveillance reports that it houses to ensure that such issues are resolved in a timely and efficient manner.
Risk Ranking and Enhanced Due Diligence. IB has implemented a Customer Risk Ranking Program designed to capture the overall AML risk posed by individual customers considering a variety of factors. IB has also implemented an EDD program tied to the Customer Risk Ranking Algorithm that subjects certain IB customers to heightened scrutiny both at account opening and on an ongoing basis. 

Restrictions on Certain High-Risk Activity. The firm is implementing restrictions on money movement designed to mitigate higher risk cross-border and other cashiering activity. The firm has further limited the types of accounts it will accept from high risk countries. The firm also implemented significant restrictions on transfers of U.S. microcap securities in early 2018 and is conducting enhanced surveillance on U.S. microcap securities

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, Kimberly Ann Barentsen submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC alleges that Kimberly Ann Barentsen was first registered in 1990 and from October 2011 to April 8, 2019, she was registered with FINRA member firm First Allied Securities, Inc. he AWC alleges that Kimberly Ann Barentsen "does not have any relevant disciplinary history with the Securities and
Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization." In accordance with the terms of the AWC, FINRA found that Barentsen had violated violated FINRA Rules 3270 and 2010; and the self regulator imposed upon her a $5,000 fine and an two-month suspension from association with any FINRA member in all capacities. As alleged in part in the AWC:

In the fall of 2016, Barentsen created her own registered investment adviser of which she was the sole owner and employee. In seeking approval for this outside business, Barentsen told the firm in an email and in a disclosure questionnaire that her advisory business would only charge hourly fees and fixed one-time financial planning fees. First Allied approved her outside business based on these representations. 

In December 2016, Barentsen began offering a new service to her advisory clients where she would charge an annual 1.5 percent asset-management fee for managing variable annuity subaccounts. She did not disclose this new service or the associated fees to the firm. After First Allied discovered the undisclosed asset-management fees in January 2019, Barentsen ceased charging the fees and terminated her arrangement with the variable annuity provider. 

In addition, in 2017 and 2018, Barentsen made inaccurate statements in her annual compliance questionnaires to the firm. In response to questions asking whether her advisory business had assets under management and if she was compensated through a percentage of the assets under management, Barentsen incorrectly stated that she did not manage assets and only charged hourly fees.