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SEC Charged New York Brokerage Firm And Former Compliance Officer With Gatekeeping And AML Failures Related To Penny Stock Sales
02/07/2017On January 25, 2017, the Securities and Exchange Commission (“SEC”) filed contested administrative proceedings against Windsor Street Capital (“WSC”), a NY-based brokerage firm, and its former chief compliance officer (“CCO”) and anti-money laundering officer, John David Telfer, for gate-keeping and AML failures related to sales of penny stocks that WSC facilitated. In the Matter of Windsor Street Capital, L.P. (f/k/a Meyers Associates L.P.) and John David Telfer, Admin. Proc. No. 3-17813 (Jan. 25, 2017) (“Order”). The SEC alleged that on numerous occasions between 2013 and the date of the Order, WSC facilitated the unregistered sale of hundreds of millions of penny stock shares without performing adequate due diligence, in violation of Section 5 of the Securities Act of 1933 and failed to file suspicious activity reports (“SARs”) for transactions totaling at least $24.8 million with the United States Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), as required under the Bank Secrecy Act of 1970 and in violation of the Exchange Act of 1934. Tefler, according to the SEC, was personally responsible for monitoring customer transactions for suspicious activity and thus aided and abetted WSC’s violations of the Exchange Act Section 17(a) and Rule 17a-8.
While the SEC has previously emphasized that it will only seek to bring claims against individual CCOs in limited circumstances, Andrew M. Calamari, Director of the SEC’s New York Regional office and Co-Chair of the Enforcement Division’s Broker-Dealer Task Force, stated that the task force’s “AML initiative is focused precisely on the conduct charged against [WSC], which we allege systematically flouted its obligations under the securities laws to report suspicious activity.” SEC Press Release, Brokerage Firm Charged with Gatekeeping Failures Related to Pump-and-Dump Scheme, Rel. No. 2017-33 (Jan. 25, 2017). Specifically, the SEC alleges that WSC and Telfer should have known or at least inquired about the suspicious circumstances (i.e., “red flags”) behind many transactions occurring in customer accounts, as customers repeatedly deposited large blocks of penny stock, liquidated them typically amid substantial promotional activity which was publicly viewable, and then transferred the proceeds away from the firm. The SEC alleges that the shares deposited by customers could not be sold legally because no registration statement was in effect and no registration exemption was available, which a reasonable inquiry would have revealed.
In short, the SEC appears to be alleging that WSC and Tefler are both responsible for a “wholesale failure” to carry out compliance responsibilities, which was listed by former Enforcement Director Ceresney in 2015 as one of the reasons that the SEC would seek to bring enforcement actions against compliance professionals. SEC Enforcement Director Andrew Ceresney, Speech: 2015 National Society of Compliance Professionals, National Conference: Keynote Address (Nov. 4, 2015). Otherwise, given the lack of specific allegations as to Tefler’s personal conduct, and the lack of any allegations of scienter, it is difficult to understand why the SEC would have decided to initiate proceedings against Tefler personally, and not simply the firm. WSC and Tefler have not settled, and may seek to challenge the SEC’s assessment of whether the transactions at issue contained indicia of suspicious activity requiring the filing of SARs. Additionally, because there has been no settlement, more facts as to the reason the SEC believed this case warranted personal liability may yet emerge.
