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Enforcement News: California-Based Broker-Dealer Settles With SEC in Connection with The Unregistered Distribution of Stock and The Failure to File SARs Pertaining to Those Transactions

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  • Posted on: Dec 20 2021

By: Jeffrey M. Haber

Broker-dealers are required to file suspicious activity reports (“SARs”) for transactions suspected to involve fraud or a lack of an apparent lawful business purpose. In that regard, under Section 17(a) of the Securities Exchange Act and Rule 17a-8 promulgated thereunder, a registered broker-dealer is required to file a SAR when it knows, suspects, or has reason to suspect that certain transactions (1) involve funds derived from illegal activity, (2) involve the use of the broker-dealer to facilitate criminal activity, (3) are designed to evade any requirement of the Bank Secrecy Act, or (4) have no business or apparent lawful purpose.

The U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) instructs SAR filers to “provide a clear, complete, and concise description of the activity, including what was unusual or irregular that caused suspicion” in the narrative and to “include any other information necessary to explain the nature and circumstances of the suspicious activity.” See FinCEN, FinCEN Suspicious Activity Report (FinCEN SAR) Electronic Filing Instructions (October 2012) (here). To be effective, the SAR should describe “the five essential elements of information – who? what? when? where? and why? – of the suspicious activity being reported.” Seee.g., FinCEN, Guidance on Preparing a Complete & Sufficient Suspicious Activity Report Narrative (Nov. 2003), at 3 (here). When a SAR “lack[s] basic information regarding the Five Essential Elements … [the] SAR [i]s deficient as a matter of law.” See SEC v. Alpine Sec. Corp., 308 F. Supp. 3d 775, 800 (S.D.N.Y. 2018) [here], aff’d, 982 F.3d 68 (2d Cir. 2020). 

[Ed. Note: we wrote about enforcement actions involving the failure to file proper SARS here and here.]

In The Matter of Wedbush Securities Inc.

On December 15, 2021, the Securities and Exchange Commission (“SEC”) announced (here) that Wedbush Securities Inc., a California-based broker-dealer, agreed to pay more than $1.2 million to settle charges arising from the unlawful unregistered distribution of nearly 100 million shares of more than 50 different low-priced microcap companies, and from Wedbush’s failure to file SARs pertaining to those transactions.

According to the SEC’s order (here), from January 2017 through September 2018, Wedbush engaged in unregistered offers and sales of large blocks of low-priced securities that were part of the unlawful, unregistered distribution of securities by Silverton SA (a/k/a Wintercap SA), a former offshore customer. The SEC found that Wedbush failed to conduct a reasonable inquiry into the facts surrounding the sales, and therefore Wedbush’s offers and sales did not qualify for the usual exemption from registration that applies to brokers’ transactions. The SEC also found that, despite the presence of numerous red flags that Wedbush had identified in its written guidance to employees, Wedbush failed to file SARs for certain suspicious transactions that it executed on behalf of Silverton while the account was active, as broker-dealers are required to do when transactions are suspected to involve fraudulent activity.

Commenting on the settlement, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated: “Broker-dealers have a critical obligation to inquire into the origin of any microcap security they sell, as well as an obligation to report suspicious activity relating to transactions in the markets. It is our expectation that they will fully perform these important gatekeeping obligations, and when they fail to do so we will hold them accountable.”

In the the SEC’s order, the SEC found that Wedbush violated the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933, and the recordkeeping requirements of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder. 

Without admitting or denying the SEC’s findings, Wedbush agreed to cease and desist from committing or causing violations of these provisions; to be censured; to pay disgorgement and prejudgment interest of over $207,000, and a civil penalty of $1 million. The SEC also directed Wedbush to engage an independent compliance consultant, who will undertake a broad review of Wedbush’s supervisory, compliance, and other policies and procedures reasonably designed to prevent violations of the federal securities laws by the firm and its employees.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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