As the AMLCO and president of his member firm, Grossman failed to demonstrate that he implemented and followed sufficient AML procedures to adequately detect and investigate potentially suspicious activity.
Grossman did not consider the AML procedures and rules to be
applicable to the type of accounts held at the firm and therefore did not
adequately utilize, monitor or review for red flags listed in the firm’s
procedures. His daily review of trades
executed at the firm and all outgoing cash journals and wires, Grossman did not
identify any activity of unusual size, volume or pattern as an AML concern. The
firm’s registered representatives, who were also assigned responsibility for
monitoring their own accounts, failed to report any suspicious activity to
Grossman. Until the SEC and/or FINRA alerted
Grossman to red flags of suspicious conduct, Grossman did not file any SARs.
Grossman failed to implement adequate procedures reasonably designed to detect and cause the reporting of suspicious transactions and, even with those minimal procedures that he had in place at the firm, he still failed to adequately implement or enforce the firm’s own AML program. For example, accounts were opened at the firm within a short period of each other that engaged in similar activity in many of the same penny stocks, and several red flags existed in connection with these accounts that should have triggered Grossman’s obligations to undertake scrutiny of the accounts, as set out in the firm’s procedures, including possibly filing a SAR. Additionally,individuals associated with the accounts had prior disciplinary histories, including securities fraud and/or money laundering. Because of Grossman’s failure to effectively identify and investigate suspicious activity,he often failed to identify transactions potentially meriting reporting through the filing of SARs. Moreover, Grossman failed to implement an adequate AML training program for appropriate personnel; the AML training conducted was not provided to all of the registered representatives at the firm.
Furthermore, Grossman failed to establish and maintain a supervisory system at the firm to address the firm’s responsibilities for determining whether customer securities were properly registered or exempt from registration under Section 5 of the Securities Act of 1933 (Securities Act) and, as a result, Grossman failed to take steps, including conducting a searching inquiry, to ascertain whether these securities were freely tradeable or subject to an exemption from registration and not in contravention of Section 5 of the Securities Act. The firm did not have a system in place, written or unwritten, to determine whether customer securities were properly registered or exempt from registration under Section 5 of the Securities Act; Grossman relied solely upon the clearing firm, assuming that if the stocks were permitted to be sold by the clearing firm, then his firm was compliant with Section 5 of the Securities Act.
Grossman failed to designate a principal to test and verify the reasonableness of the firm’s supervisory system, and failed to establish, maintain and enforce written supervisory control policies and procedures at the firm and failed to designate and specifically identify to FINRA at least one principal to test and verify that the firm’s supervisory system was reasonable to establish, maintain and enforce a system of supervisory control policies and procedures.
The firm created a report, which was deficient in several areas, including in its details of the firm’s system of supervisory controls, procedures for conducting tests and gaps analysis, and identities of responsible persons or departments for required tests and gaps analysis. Grossman made annual CEO certifications, certifying that the firm had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and registrations; the certifications were deficient in that they failed to include certain information, including whether the firm has in place processes to establish, maintain and review policies and procedures designed to achieve compliance with applicable laws and regulations and whether the firm has in place processes to modify such policies and procedures as business, regulatory and legislative events dictate.
Grossman failed to ensure that the firm’s heightened supervisory procedures placed on a registered representative were reasonably designed and implemented to address the conduct cited within SEC’s allegations; the additional supervisory steps imposed by Grossman to be taken for the registered representative were no different than ordinary supervisory requirements. Moreover, there was a conflict of interest between the registered representative and the principal assigned to monitor the registered representative’s actions at the firm;namely, the principal had a financial interest in not reprimanding or otherwise hindering the registered representative’s actions. Furthermore,Grossman was aware of this conflict, yet nonetheless assigned the principal to conduct heightened supervision over the registered representative.
The heightened supervisory procedures Grossman implemented did not contain any explanation of how the supervision was to be evidenced, and the firm failed to provide any evidence that heightened supervision was being conducted on the registered representative. Also, Grossman entered into rebate arrangements with customers without maintaining the firm’s required minimum net capital. Similarly, he caused the firm to engage in a securities business when the firm’s net capital was below the required minimum and without establishing a reserve bank account or qualifying for an exemption. Grossman was required to perform monthly reserve computations and to make deposits into a special reserve bank account for the exclusive benefit of customers, but failed to do so.
Gallagher acted as a principal of his member firm without being registered as such and the firm allowed Gallagher to act in an unregistered capacity.
Gallagher failed to adhere to the heightened supervisory requirements FINRA imposed and the agreements he entered into with three states; because of his controlling role at the firm and the transitory nature of supervision at the firm, he was able to sidestep the heightened supervision requirements. The firm failed to ensure that Gallagher’s heightened supervisory requirements from the states and FINRA were being followed, and failed to have a system to adequately monitor Gallagher’s compliance.
Gallagher was responsible for the firm adhering to the requirements to establish, maintain and enforce written supervisory control policies and ensuring the completion of an annual certification certifying that the firm had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and regulations. The firm failed to conduct the analysis required to determine whether, as a producing manager, Gallagher should have been subjected to the heightened supervision requirements.
The firm failed to establish, maintain and enforce written supervisory control policies and procedures and failed to identify at least one principal who would establish, maintain and enforce written supervisory control policies and procedures. In addition, through Gallagher, the firm, failed to ensure that an annual certification was complete, certifying it had in place processes to establish, maintain, review, test and modify written compliance policies and WSPs to comply with applicable securities rules and regulations.
Moreover, FINRA found that the firm failed to report customer complaints against Gallagher and one customer-initiated lawsuit in which he was listed as a defendant.
Furthermore, the firm failed to make the necessary and required updates to Forms U4 and U5 for representatives to reflect customer complaints, arbitrations and lawsuits within the required 30 days.
Thefirm failed to conduct and evidence an independent test of its AML program, and failed to conduct and evidence an annual training program of its CE program for its covered registered persons.
While testifying at a FINRA on-the-record interview, Gallagher failed to respond to questions.
Gallagher willfully failed to timely amend his Form U4 with material facts. Gallagher appealed the decision to the NAC and the sanction is not in effect pending the appeal.
Vision Securities Inc.: Censured; Fined $60,000
Daniel James Gallagher: Barred
Campbell failed to enforce his member firm’s heightened supervisory procedures with respect to one of its representatives.
According to those procedures, Campbell was responsible for determining the scope of the heightened supervision and ensuring that the representative’s supervisor was enforcing the heightened supervision plan. The firm required that the plan be individualized based on the representative’s disciplinary history. Campbell placed a representative on heightened supervision because of his disciplinary history, and the plan Campbell prepared was deficient because it was not tailored to that representative’s history of engaging in private securities transactions and did not provide for any material additional supervision beyond the usual steps that were taken to oversee other firm representatives. Campbell failed to ensure that the plan was implemented and, as a result,the following actions that were required pursuant to the plan were not undertaken: