Pinnacle Capital Markets LLC and its managing director settled SEC charges that they failed to identify and verify the identities of its customers and document its procedures for doing so, as required by AML rules.   Managing director Michael Paciorek was charged with having caused causing Pinnacle's violations.  Pinnacle will pay an SEC fine of $25K.  Concurrently, Pinnacle will pay a FinCEN fine of $50K.

As part of an action taken by FINRA in February 2010, Pinnacle also has agreed to certain undertakings - including extensive AML training for employees, the hiring of an independent consultant to review its AML compliance program.

In a parallel action also announced today, the Financial Crimes Enforcement Network (FinCEN) assessed a penalty against Pinnacle for violating the Bank Secrecy Act (BSA).

    Pinnacle Capital Markets, a broker-dealer based in Raleigh, NC, has more than 99% of its customers residing outside the United States.  It's business primarily involves order processing with direct market access (DMA) software for foreign institutions - mostly banks, brokerage firms, foreign individuals.  While Pinnacle had a customer identification program that specified it would identify and verify the identities of all its customers, Pinnacle failed to follow those procedures during a 6-year period.

"Left unchecked, Pinnacle's business model yields significant money laundering risks.  If a broker-dealer provides customers with direct access to the U.S. securities markets, it must comply with the applicable customer identification rules."  -- Robert Khuzami, SEC Enforcement Director

"Direct market access was a big selling point to Pinnacle's customers. The sub-account holders of the omnibus accounts held at Pinnacle were permitted to place trades directly in their own accounts using the DMA software and functioned as customers. The customer identification rules require that they be treated as such."  -- Thomas Sporkin, SEC Office of Market Intelligence Chief

According to the SEC, many foreign entity customers hold omnibus accounts at Pinnacle through which the entities carry sub-accounts for their own corporate or retail customers.  Pinnacle treats the sub-account holders of the foreign entity omnibus accounts in the same manner as it does its regular account holders.  The vast majority of Pinnacle's regular account holders, as well as the omnibus sub-account holders, use DMA software to enter securities trades directly and instantly through their own computers.  As a result, these account holders have direct, unfiltered control over how securities transactions are effected in the accounts.  The foreign entity holding the omnibus account does not intermediate these trades.  The DMA software allows the omnibus sub-account holders to route their securities transactions directly to the relevant market centers without intermediation.

Specifically, from October 2003 to August 2006, Pinnacle did not verify the identities of 34 out of a sample of 55 corporate account holders.  From October 2003 through November 2009, Pinnacle did not collect or verify identifying information for the vast majority of the beneficial owners of sub-accounts maintained by Pinnacle's omnibus brokerage accounts.  Thus, Pinnacle's documented procedures differed materially from its actual procedures.

SEC's David Smyth and Sarit Klein were credited with having conducted the SEC's investigation.  [ SEC PR 10-161, 9/1]