Compliance Officer Latest to Settle AML Charges in Aegis Capital Case
The SEC wants anti-money laundering rules followed – and will go after both firms and individuals at firms that it believes violate those rules. A compliance officer at a dually-registered adviser and broker-dealer learned this the hard way earlier this month after he allegedly failed to file Suspicious Activity Reports on hundreds of transactions.
Eugene Terracciano served as an AML CO at New York City-based Aegis Capital. The firm, which has multiple branches, is active in investment banking, venture capital and debt market services, and also has full-service retail and institutional advisory and brokerage businesses, according to the SEC’s settlement order.
"From September 2013 through early 2014," that order states, "all while Terracciano was serving as Aegis’ AML CO, Aegis failed to file Suspicious Activity Reports (SARs) on hundreds of transactions when it knew, suspected or had reason to suspect that the transactions involved the use of the broker-dealer to facilitate fraudulent activity or had no business or apparent lawful purpose."
The red flags were hardly innocuous, the SEC said. "Many of the transactions involved red flags of potential market manipulation, including high trading volume in companies with little or no business activity during a time of simultaneous promotional activity. Aegis did not file SARs on these transactions even when it specifically identified AML red flags implicated by these transactions in its written supervisory procedures."
The firm itself, as well as its founder/CEO and another AML CO, Kevin McKenna, each separately settled charges in the matter this past March. Just why Terracciano’s settlement was delayed by approximately four months is not clear, but the fact that the SEC pursued and ultimately settled with two compliance officers in this case shows the degree to which the agency takes anti-money laundering violations seriously.
"Aegis failed to meet its AML obligations to report suspicious activity, including when it was faced with specific information alerting the firm to suspicious transactions," said SEC Division of Enforcement associate director Antonia Chion. "Given the critical importance of SARs to the regulatory and law enforcement community, brokerage firms must comply with their SAR reporting obligations."
"This case reflects the SEC’s increasing trend of naming CCOs for compliance failures," said Rogers & Hardin partner Stephen Councill. "In this case, one might be sympathetic to the compliance officer, who allegedly failed to file SARs during the first several months after he took on the position. When concerns arose, he revised his compliance manual and improved the firm’s procedures, but apparently failed to recognize that SARs should have been filed during the first several months he was on the job. The SEC is sending a message that anyone accepting the CCO title needs to be on top of all the issues almost immediately."
Ropes & Gray counsel Jeremiah Williams noted that "in 2015, former Director of Enforcement Andrew Ceresney identified three categories of cases in which CCOs may be charged: 1) when they are affirmatively involved in misconduct; 2) when they obstruct or mislead SEC staff; and 3) when they ‘exhibited a wholesale failure’ with respect to their responsibilities (ACA Insight, 11/9/15). Ceresney was talking about CCOs for investment advisers as opposed to the AML context in these cases, but the same logic applies and these AML officers seem to fall in Ceresney’s third category. They failed to file hundreds of SARS despite known red flags."
While Aegis Capital, as part of its settlement with the SEC, was censured, agreed to pay a $750,000 penalty and retain a compliance expert – in addition to a $550,000 fine from FINRA, the two compliance officers settled for relatively light penalties of $20,000 each, although McKenna was also banned from the securities industry for 18 months. The firm’s CEO was ordered to pay $40,000.
In a statement, a spokesperson for Aegis Capital said that the activities referenced in the settlements "occurred more than four years ago, related to only seven DVP accounts, and resulted in no harm to any Aegis clients. Aegis has long since exited this business line, and the brokers involved are no longer with the Firm. Aegis is pleased to have satisfactorily resolved this legacy matter." Attorneys representing Terracciano and McKenna did not respond to a voice mail or email seeking comment.
The red flags
Aegis listed specific red flags associated with low-priced security transactions in its written supervisory procedures, since the firm had brokerage customers who transacted in low-priced securities, the agency said. The listed red flags, many of which were also described as red flags in FINRA industry notices, according to the SEC included the following:
A sudden spike in investor demand for, coupled with a rising price in, a thinly-traded or low-priced security;
An issuer that has been through several recent name changes, business combinations or recapitalizations, or with company officers that are also officers of numerous similar companies;
An issuer’s SEC filings that are not current, are incomplete or non-existent;
A customer that appears to be acting as an agent for an undisclosed principal, but declines or is reluctant, without legitimate commercial reasons, to provide information or is otherwise evasive regarding that person or entity;
A customer’s account with wire transfers that have no apparent business purpose to or from a country identified as a money-laundering risk or bank secrecy haven; and
A customer that, for no apparent reason or in conjunction with other red flags, engages in transactions involving certain types of securities, such as penny stocks . . . which although legitimate, have been used in connection with fraudulent schemes and money-laundering activity.
Beyond these red flags, according to the settlement order, Aegis had specific written supervisory procedures that dealt with compliance with its AML responsibilities. These procedures "expressly identified Aegis’ AML CO as the individual responsible for deciding whether the firm needed to file an SAR. Aegis employees were also required to promptly report to the AML CO any known or suspected violations of anti-money laundering policies and other suspected violations.
Under the law, the SEC said, Aegis was required to file SARs for transactions in which the firm was involved of at least $5,000 if Aegis "knew, suspected or had reason to suspect" that the transactions involved funds derived from illegal activity, had no business or apparent lawful purpose, or involved using Aegis to facilitate criminal activity.
In working with brokerage customers that transacted in low-priced securities, Aegis did so through what is known as "delivery versus payment/received versus payment" (DVP/RVP) accounts, the agency said. "In DVP/RVP accounts held at Aegis, the customer deposited their shares at another firm in a custodial account, and the sale transactions were effected through Aegis." The firm worked with a number of clearing firms that assisted in these transactions, the agency said.
Aegis also had customers at branch offices who made transactions in low-priced securities. "Several of these customers were foreign financial institutions that effected transactions on behalf of their underlying customers, all of whom were unknown to Aegis," the SEC said.
Terracciano, in his role as an AML CO, "failed to file SARs on Aegis’ behalf concerning low-priced securities transactions, and did not produce a written analysis or otherwise demonstrate that he had considered filing SARs for these transactions," the agency said.
SARs were not filed "despite the fact that numerous low-priced securities transactions effected through the firm exhibited several of the AML red flags that Aegis specifically identified in its written supervisory procedures," the SEC said. These included, the agency said, SARs on transactions in which firm customers were:
Selling large quantities of low-priced securities that comprised a significant percentage of the issuers’ daily trading volume and outstanding float;
Trading shares of issuers who had changed names and business lines;
Selling substantial shares of low-priced securities during periods of spikes in price and volume of the issuers’ securities and during paid promotional campaigns; and/or
Trading in shares of issuers’ that had little or no market activity until the promotions began.
Even when Terracciano received AML Alerts from Aegis’ clearing firm about suspicious transactions, "Terracciano failed to file SARs," the SEC said. He did not produce a written analysis or otherwise demonstrate that he had considered filing SARs, nor did he follow up with others to learn why Aegis employees or the firm’s trade surveillance system had not brought suspicious transactions identified in the AML Alerts to his attention.
"Had Terracciano followed up to learn why suspicious transactions were not being brought to his attention through the firm’s own internal systems, he would have learned that the firm’s trade surveillance system did not analyze DVP/RVP transactions for suspicious activity. Rather, he would have learned that these transactions were simply batch approved by the applicable Aegis personnel," the agency said.
Terracciano was charged by the SEC with willfully aiding and abetting, as well as causing, Aegis’ violations of Section 17(a) of the Exchange Act and its Rule 17a-8, which requires broker-dealers to comply with the reporting, recordkeeping and record retention requirements of the Bank Secrecy Act. The firm itself, in its earlier settlement with the agency, was charged with willfully violating Section 17(a) and Rule 17a-8, and, in addition to its fine and agreeing to retain a consultant, was censured.
The other AML CO, McKenna, was charged with willfully aiding and abetting, as well as causing, Aegis’ violations of the same Exchange Act Section and Rule, while the firm CEO was charged with being a "cause" of Aegis’ violations, according to the settlement order.