Published on:

FINRA Fines Member $8 Million for Anti-Money Laundering Compliance Failures Relating to Penny Stock Transactions

The Financial Industry Regulatory Authority (“FINRA”) announced that it has levied fines against brokerage firm Brown Brothers Harriman & Co. (“BBH”), based in New York, and its former Global Anti-Money Laundering Compliance Officer Harold Crawford. In a Letter of Acceptance, Waiver, and Consent dated February 4, 2014 (“AWC”), BBH and Crawford consented to fines of $8 million and $25,000, respectively. Crawford also agreed to a one month suspension.

According to FINRA, BBH failed to have adequate anti-money laundering (“AML”) procedures in place to monitor and detect suspicious transactions in penny stocks. In addition, FINRA claimed the firm failed to adequately investigate potentially suspicious trading in penny stocks, when the suspicious activity was brought to the firm’s attention. Penny stocks generally refer to securities that trade at less than $5 per share, and are quoted over-the-counter.

According to the AWC, from January 1, 2009 to June 30, 2013, six billion shares of penny stocks were traded by or delivered through BBH, many of the transactions were made on behalf of undisclosed customers of foreign banks in countries known to be bank secrecy havens, such as Guernsey and Jersey, British owned islands off the coast of Normandy, and Switzerland. The AWC claims these penny stock transactions generated approximately $850 million in sales proceeds.

The Securities and Exchange Commission has previously warned that penny stocks may be easily manipulated by fraudsters who distribute false information about the issuer company in order to create demand for the stock. As trading in the stock increases and the stock price rises, the fraudsters sell their own shares at inflated prices. Thereafter, the stock price falls and investors lose their investment.

According to the AWC, federal law required BBH to investigate customer activity on a risk basis. Accounts engaged in frequent suspicious penny stock transactions merited additional scrutiny. However, FINRA claims that BBH completed the suspicious penny stock transactions without obtaining basic information needed to verify that the securities were properly registered or exempt from registration, such as the identity of the stock’s beneficial owner, the seller’s relationship to the issuer, and how the stock was obtained.
To read more about brokerage firms’ obligations to investors, click here.

Business Litigation | False Claims Act & Whistle-blower Cases

Posted in: FINRA
Published on:
Updated:

Comments are closed.