The president of Leeb Brokerage Services, a now-defunct NY-based broker-dealer with an OSJ in California, was responsible for supervising: the home office, the trading desk, firm-wide “penny stocks/microcap” activity, all trading activity for the firm, including activity at the OSJ.  From April 2004 to April 2007, E. Miller, 52, was president of Leeb.  Troubles began brewing at the firm in April 2005. 

    Active Sales of Unregistered Penny Stocks.   From April 2005 to April 2007, certain customers of Leeb routinely delivered into their accounts large blocks of privately obtained shares of penny stocks, which Leeb then sold to the public on behalf of the customers, without any registration statements being in effect.  Among the red flags:

• red flags with penny stock sales:  (i) customers for whom the stocks were sold;  (ii) method and timing of the sales;  (iii) way that sales proceeds were subsequently routed. 
  

• red flags with customers:  (i) a customer had a prior pump-and-dump related consent judgment; (ii) persons whom RR's knew or should have known were engaged in promotional activity in the same stocks they were selling; (iii) individuals controlled more than one brokerage account under different corporate names.

• red flags with how shares were sold:  (i) customers repeatedly delivered in and sold privately obtained shares of penny stocks;  (ii) sales were made within weeks of receipt;  (iii) sales were made while promotional activity took place;  (iv) sales represented a high percentage of trading volume or of an issuer’s public float.

• other red flags:  (i) a stock promoter customer sold hundreds of millions of privately obtained penny stock shares through 2 separate corporate accounts that he controlled;  his daughter was listed as the sole proprietor and officer of both companies;  (ii) an account held by a customer incorporated in Nevis was operated by persons in Vancouver; with orders coming through traders in Costa Rica;  with wired proceeds exceeding $30mn to a bank in Liechtenstein.

• red flags with RR's failures:  (i) failed to conduct due diligence on the securities;  (ii) failed to obtain documentation as to how customers acquired the securities, length of time customers had held the stock, customers’ intent to sell additional shares, or how customers’ selling activities compared with the issuer’s outstanding share balance and trading volume;  (iv) failed to prepare Low-Priced Securities Questionnaires for numerous penny stocks traded through customer accounts.

    Supervisory Failures.   Although Miller regularly reviewed the firm’s penny stock trading activity and regularly communicated with the OSJ branch manager re: penny stock activity conducted through the OSJ, Miller didn't identify any red flags or question the source of any of the stock sold through the firm.

He ignored other red flags that he was aware of - e.g., repeated regulatory inquiries concerning certain customer accounts or specific penny stocks.  Despite his concern over the number of such inquiries, Miller never subjected any RR or customer account to heightened scrutiny, didn't question the RR;s re: whether they conducted inquiries into the customers’ penny stocks, and didn't conduct additional account reviews.

    BSA/AML Failures.   Leeb’s AML program enumerated a number of examples that could be indicative of the need to a file a SAR - (i) history of criminal, civil, or regulatory violations by the customer or an associate; (ii) multiple LLCs with the same address; (iii) multiple transfers of funds to/from bank secrecy jurisdictions, tax havens, or non-cooperative jurisdictions as identified by the Financial Action Task Force (“FATF”) or FinCEN; and (iv) penny stock activity.  Furthermore, Leeb’s AML program charged all employees with responsibility for AML compliance, including identifying red flags that would be indicative of the need for Leeb to file a SAR.

Miller knew of his obligation to assist Leeb in fulfilling its requirement to file SARs, and knew or was reckless in not knowing that significant suspicious activity was not being reported by Leeb as a result of his actions. 

    Undertakings.   In settling with the SEC, Miller agreed to cooperate fully with the Commission in any and all investigations, litigations or proceedings relating to or arising from the matters described in the Order.  He was suspended as a supervisor for 12 months.  And, he paid a $50K civil penalty.   For further details, click onto:  [ SEC '34Act Release 62750, 8/20 ]