Yesterday (November 26, 2018) FINRA Enforcement filed a complaint (pdf) against Lek Securities and Samuel Lek, the firm’s founder and CEO. Please note that this is a complaint from FINRA Enforcement and not a decision. In the future a FINRA officer from the Office of Hearing Officers (OHO) along with two industry panelists will hold a hearing on the issue and they will decide whether the firm violated FINRA rules and what penalties if any to levy. Read more about such proceedings. From the complaint:
1. Between January 2014 and December 2016 (the “Relevant Period”), Lek Securities Corporation (the “Firm” or “LSC”), acting through Samuel Frederik Lek (“Lek”),
failed to develop and implement a reasonable Anti-Money Laundering (“AML”) program and supervisory system for one of its lines of business, namely the deposit and trading of low-priced penny stocks (“microcap stocks”) by Firm customers.
2. As a result of these failures, the Firm, through Lek, did not establish and implement AML policies and procedures that could be reasonably expected to detect, investigate and report, where appropriate, potentially suspicious activity in microcap stocks, thereby violating FINRA Rules 3310(a) and 2010.
3. In addition, the Firm failed to comply with numerous other AML obligations,
including failing to conduct Financial Crimes Enforcement Network (“FinCEN”) 314(a) reviews in violation of FINRA Rules 3310(b) and 2010; failing to conduct reasonable AML testing in violation of FINRA Rules 3310(c) and 2010; and failing to provide reasonable AML training in violation of FINRA Rules 3310(e) and 2010.
4. The Firm, through Lek, also failed to establish, maintain and enforce a supervisory system reasonably designed to achieve compliance with Section 5 of the Securities Act of 1933, in violation of NASD Rule 3010 and FINRA Rules 3110 and 2010.
5. As a result, the Firm also facilitated the unlawful distribution of securities in contravention of Section 5 of the Securities Act of 1933 and thus in violation of FINRA Rule 2010
The end result of these failures, according to the complaint:
6. All of the violations described above occurred while the Firm allowed its account
owners to engage in millions of dollars of microcap stock deposit and trading, including accounts that were owned by individuals previously charged with regulatory violations, known toxic-debt financiers, and omnibus accounts established in foreign jurisdictions with unknown beneficial owners.
7. In total, these particular Firm accounts liquidated more than 56 billion shares of microcap stocks and generated approximately $100 million of proceeds, for which the Firm received approximately $1.6 million in commissions.
The complaint details Lek’s involvement in penny stock / microcap business (emphasis mine):
18. During the Relevant Period, the Firm generated approximately $110 million in
revenue through its independent order execution and clearing services, of which approximately $5.3 million was derived from microcap stock activity — $3.6 million attributable to microcap stock trading and $1.7 million from dematerializing microcap stock certificates (i.e., converting physical stock certificates into electronic book-entry form in order for those shares to be traded and settled on the Firm’s platform).
Companies mentioned in the complaint are Daniels Corporate Advisory Co (DCAC), Cherubim Interests LLC (CHIT), New Colombia Resources Inc (NEWC), US Stem Cells Inc (USRM), Cannabis Science Inc (CBIS), Zentric (ZNTR), and First Colombia Gold Corp (FCGD).
Interestingly, the trading of one of those stocks (CBIS) was in Lek UK Omnibus Account (LUO) which “was an omnibus account controlled by a Firm affiliate and utilized to conduct trading for underlying customers located outside the U.S.”
The six causes of action listed in the complaint are as follows (in parentheses after each cause of action is shows whether it applies to Lek Securities Corp “LSC” or Samuel Lek “Lek”):
- FAILURE TO ESTABLISH AND IMPLEMENT A REASONABLE AML PROGRAM
Violation of FINRA Rules 3310(a) and 2010 (LSC and Lek)
- FAILURE TO SUPERVISE FOR COMPLIANCE WITH SECTION 5 OF THE SECURITIES ACT OF 1933 Violation of NASD Rule 3010, and FINRA Rules 3110 and 2010 (LSC and Lek)
- SALE OF UNREGISTERED SECURITIES Violation of FINRA Rule 2010 (LSC)
- FAILURE TO CONDUCT SEARCHES PURSUANT TO SECTION 314(A) OF THE PATRIOT ACT Violation of FINRA Rules 3310(b) and 2010 (LSC)
- FAILURE TO CONDUCT REASONABLE AML TESTING Violation of FINRA Rules 3310(c) and 2010 (LSC)
- FAILURE TO PROVIDE REASONABLE AML TRAINING Violation of FINRA Rules 3310(e) and 2010 (LSC)
It appears to me that FINRA and the SEC are continuing to focus on violations relating to the deposit and sale of microcap stocks and the proper supervisory procedures to prevent such violations. See my blog posts on FINRA and SEC actions against Chardan, ICBCFS, Aegis, and Cor.