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AMLCO Flagged for Not Investigating Penny Stock Red Flags
Ronald Nicklas Jr., of Hayden Lake, ID, agreed to a $10K fine and a 4-month suspension in any principal capacity to settle FINRA charges that, as his member firm’s anti-money laundering compliance officer (AMLCO), he failed to implement an AML compliance program that was reasonably designed to detect and cause the timely reporting of suspicious activity.
BACKGROUND. Ronald Nicklas, Jr., entered the securities industry in June 1982, and from 1985 until his termination in 2015, he was associated with Pennaluna & Company. He’s currently not registered with any firm.
FACTS AND VIOLATIVE CONDUCT ACCORDING TO FINRA. Pennaluna’s AML Compliance Program described various red flags of potentially suspicious activity which, upon detection by firm personnel, would trigger further review by the AMLCO. Nicklas, himself, was also expected to independently detect the presence of any red flags by using exception reports. Once alerted to a red flag, Nicklas was required to decide whether further review or investigation was warranted.
Examples of red flags included, the following:
- Wire activity that is unexplained, repetitive, unusually large or shows unusual patterns or with no apparent business purposes;
- Customer has opened multiple accounts with the same beneficial owners or controlling parties for no apparent business reason;
- Customer transactions include a pattern ofreceiving stock in physical form or the incoming transfer of shares, selling the position and wiring out proceeds;
- Maintains multiple accounts, or maintains accounts in the names of family members or corporate entities with no apparent business or other purpose; and .
- The Company's stock is priced below a penny.
During the relevant period - from February 2010 through April 2012 - the firm accepted for deposit and subsequently facilitated the sale of millions of shares of low-priced securities. More specifically, 8 customer accounts at Pennaluna - 3 of which were controlled by the same individual - deposited approximately 225 million unregistered shares of 7 different, low-priced securities.
During the weeks and months following the deposits, these customers sold around 173 million of the deposited shares for proceeds totaling just over $1.5 million. Of the shares sold, ome 160 million of the shares were sold at prices of less than one penny. Sales of the deposited shares typically were followed by wire transfers of at least some portion of the proceeds to accounts outside of the firm without re-investment.
The deposits and rapid sales of unregistered, low-priced securities, as well as the subsequent wire transfers of proceeds after the sales, presented red flags that should have prompted Nicklas to conduct further investigation for potentially suspicious activity and to determine whether the filing of a suspicious activity report was necessary. Instead, Nicklas did not sufficiently investigate the red flags.
This case was reported in FINRA Disciplinary Actions for April 2017.
For details on this case, go to … FINRA Disciplinary Actions Online, and refer to Case #2012030446701.