The price tag for failing to detect suspicious activity in penny stocks through an adequate anti-money laundering program continues to increase. Oppenheimer & Co., Inc. recently agreed to pay FINRA more than $1.4 million to settle a disciplinary proceeding brought in May 2013 based on problems in the firm’s supervisory system and anti-money laundering program. FINRA’s release details how seven brokers in five branches sold more than one billion shares of twenty low priced, speculative securities known as “penny stocks,” without proper registration under the securities laws, and also without detection by the firm’s internal controls.
FINRA’s release highlights numerous red flags of suspicious activity that the firm was aware of and failed to investigate. Specifically, the firm did not notice when customers made large deposits of penny stocks and then sold them immediately after deposit, when customers deposited large quantities of penny stocks shortly after opening an account, or when the penny stock deposits represented a significant percentage of the company’s float in the market. In short, FINRA found that the firm’s AML program focused on money movement, not securities transactions, and therefore failed to monitor patterns of suspicious activity associated with the penny stock trades. FINRA also scrutinized the firm’s decision to open a broker-dealer account for a Bahamas-domiciled company without enquiring into the Bahamas’ enforcement regime or examining the customer’s anti-money laundering policies and procedures, among other missteps.
FINRA’s emphasis on red flags in this action—and its continued willingness to punish firms that don’t spot them—is consistent with other recent FINRA settlements, as we reported in an earlier post. (See our recent post.) This action signals FINRA’s continued focus on firms’ implementation of effective AML procedures, and should motivate industry players to review and refine those procedures.