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NEWSLETTERS & ALERTS
Revere Securities and Ex-BOM Settle FINRA Microcap/AML Charges
by Howard Haykin
Revere Securities agreed to pay a $75K fine to settle FINRA charges that, among other things, the firm failed to develop and implement AML adequate policies and procedures for the detection and reporting of potentially suspicious activity relating to transactions involving the deposit and liquidation of millions of shares of microcap stocks.
Kurt Hurst, a former branch manager, agreed to pay a $5K fine and to not serve in a ‘principal capacity’ for 2 months to settle FINRA charges that he failed to adequately supervise suspicious microcap stock activities by one registered rep’s customers.
NOTE: For Financialish TakeAways on this case, click on: "CCO Culpability for Weak WSPs Related to Microcap Stocks."
FINRA FINDINGS. In April 2013, a new registered rep (“RR”) joined the firm. Hurst and the representative knew, at the time the representative was on-boarded, that his clients regularly engaged in microcap stock transactions. After the RR joined the firm, many of his customers deposited microcap stocks in physical certificate or electronically, and then proceeded to liquidate those positions and have the proceeds wired out shortly thereafter. All told, the RR’s customers liquidated more than 23 million shares of microcap stocks that generated proceeds of approximately $889,000.
Revere Securities’ Shortcomings.
- The firm’s AML procedures were not sufficiently tailored to a microcap stock liquidation business and the associated regulatory risks, including the use of such securities by issuers, stock promoters and others affiliated with the issuers for money laundering or to commit securities fraud or market manipulation.
- The firm’s system for reviewing for potentially suspicious trading activity consisted primarily of its manual review of daily trade blotters
- This manual review was not reasonably designed to detect patterns of potentially suspicious activity that might occur over the course of days, weeks or months.
- The firm’s system for detecting and investigating red flags relating to the microcap stock activities of representative’s customers also was unreasonable.
Kurt Hurst’s Shortcomings.
- As branch manager, Hurst was responsible for approving securities deposits and for monitoring the customer activity that followed, including potentially suspicious activity.
- Hurst failed to identify any of the deposit and liquidation activity of the RR’s customers as potentially suspicious.
- Hurst also failed to escalate any of the deposit and liquidation activity to the firm’s AML Compliance Officer.
- The firm and Hurst failed to identify any of the RR’s customers’ activities as potentially suspicious notwithstanding the existence of red flags, such as …
► Deposit and liquidation of the same microcap stock by several of the RR’s clients in a short timeframe;
► Clients with problematic criminal, civil or regulatory histories; and,
► Promotional activity.
- The firm and Hurst conducted no due diligence or investigations with respect to electronic deposits of microcap stocks and therefore made no determination that those microcap stocks were registered and free from restriction.
- For physical certificates of microcap stocks, the firm and Hurst failed to conduct reasonable due diligence before executing sales of microcap stocks to verify that the transactions were either registered or exempt from registration.
This case was reported in FINRA Disciplinary Actions for November 2017.
For details on this case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2014039396101.