On March 29, 2019 the SEC announced (pdf) an administrative proceeding in which it fined Vision Financial Markets LLC $625,000 for failures to file suspicious activity reports (SARs) regarding suspicious deposits and liquidations of penny stocks. These violations occurred from August 2013 to December 2014. Starting in 2012 Vision Financial began doing business with two introducing brokers that brought in significant penny stock business. These brokers are not named in the SEC order and are referred to as “Introducing Broker A” and “Introducing Broker B”. After a client of one of those brokers was indicted in July 2014 for a penny stock manipulation scheme Vision Financial reviewed its penny stock business and decided to cease doing business with both brokers. This decision also coincided with an SEC Office of Compliance Inspections and Examinations (SEC OCIE) inspection of Vision Financial’s penny stock business. By January 2015 Vision Financial was no longer clearing trades for those two introducing brokers. Vision Financial then updated its policies in 2015 “to prohibit clearing deposits of physical certificates of penny stocks.”
Read the summary from the order (pdf):
This matter concerns the failure by VFM, a registered broker-dealer, to file Suspicious Activity Reports (“SAR” or “SARs”) for voluminous suspicious activity relating to the deposit and sale of low-priced securities from at least August 2013 through December 2014 (the “Relevant Period”). In late 2012, VFM expanded its business of clearing equity securities by entering into clearing arrangements with several new introducing brokers. During the Relevant Period, VFM cleared millions of shares of transactions in low-priced securities on behalf of certain customers of certain of its new introducing brokers. These trades included instances in which newly introduced customer accounts exhibited a suspicious pattern in which the customer deposited a physical certificate for a substantial amount of a thinly-traded low-priced stock, systematically sold the shares into the market shortly thereafter, and then wired out the sale proceeds from its accounts. In some instances, the same customer engaged in this pattern with respect to multiple securities.
Despite clearing these suspicious transactions and other related red flags, VFM did not file timely SARs related to relevant activities by at least 100 of these accounts when it knew, suspected, or had reason to suspect that these transactions involved the use of VFM to facilitate fraudulent activity, or had no business or apparent lawful purpose.
Details on the suspicious activity of three customers (out of 101 accounts that deposited large blocks of penny stock shares and then quickly sold them and wired out the proceeds) are below:
6. Between April 2014 and May 2014, Customer A engaged in three instances of suspicious deposit-sale-wire activity involving two different low-priced securities that generated sales proceeds of more than $1.1 million. Customer A deposited a physical certificate for 600,000 shares of a certain low-priced security (“Security A1”) and liquidated the entire amount on the same day that the deposit cleared with proceeds from the transaction wired out within three days. Customer A also deposited a physical certificate for 1,500,000 shares of a second-low priced security issuer (“Security A2”) and liquidated the entire amount by the day after the deposit cleared and wired out nearly all of the proceeds within a week of clearance. Customer A subsequently deposited a physical certificate for another 1,500,000 shares of Security A2 and systematically liquidated the entire amount within one week of the clearing date and again wired out nearly all of the proceeds within one week of liquidation. There was no other activity in this account during the Relevant Period. VFM did not file a SAR with respect any of the above-described activity in Customer A’s account.
7. Between November 2013 and April 2014, Customer B engaged in several instances of suspicious deposit-sale-wire activity, including activity in at least two different low-priced securities that generated sale proceeds of approximately $1.8 million. Customer B deposited a physical certificate for 200,000 shares of a certain low-priced security (“Security B1”) and liquidated the entire amount within two days of clearance, with nearly all of the proceeds from the transaction wired out within a week of the liquidation. Customer B subsequently deposited a physical certificate for another 200,000 shares of Security B1 and liquidated the entire amount within three days of clearance, with proceeds wired out within a week of the liquidation. Customer B then made a third deposit of 200,000 shares of Security B1, began liquidating the shares, and wired out proceeds as blocks of sales occurred.
8. Customer B also deposited a physical certificate for 160,000 shares of a different low-priced security (“Security B2”), and later deposited a second physical certificate for an additional 80,000 shares of Security B2. Customer B proceeded to systematically liquidate the deposited shares and wired out proceeds of the sales as blocks of sales occurred.
9. In October 2014, shortly after VFM received a regulatory inquiry concerning the Customer B account, VFM informed the introducing broker of the Customer B account that the account had to be transferred “out of Vision ASAP” because of negative information concerning an individual associated with the account. The account subsequently sold previously-deposited penny stock positions of more than 650,000 shares and wired out proceeds exceeding $200,000 from VFM.
10. VFM did not file a SAR with respect any of the above-described activity in Customer B’s account. The Commission later brought charges against Customer B for violations of the antifraud provisions of the Securities Act of 1933 and the Exchange Act by engaging in market manipulation of Security B1 during the Relevant Period.
11. Between January 2014 and October 2014, Customer C engaged in several instances of suspicious deposit-sale-wire activity, including activity in at least two different low-priced securities that generated sales proceeds of more than $490,000. Customer C deposited a physical certificate for 4 million shares of a certain low-priced security (“Security C1”), and began systematically liquidating the shares and wiring out proceeds as blocks of sales occurred. The entire deposit was liquidated in less than one month from clearance. Customer C then repeated this process with the deposit of another physical certificate for 2 million shares of Security C1, and systematically liquidated the entire deposit within approximately one month of clearance while wiring out proceeds as blocks of sales occurred. Customer C also deposited a physical certificate for 100,000 shares of a different low-priced security (“Security C2”), and immediately began systematically liquidating the shares, and wired out the proceeds the day after the liquidation was complete. Customer C then deposited another physical certificate for an additional 100,000 shares of Security C2, liquidated the entire deposit on the day that it cleared, and wired out proceeds shortly thereafter. VFM did not file a SAR with respect to any of the above-described activity in Customer C’s account.
Total proceeds from these deposits and sales of penny stock shares were over $50 million.
The order states that Vision Financial “failed to timely file SARs concerning any of at least 250 instances of the deposit-sale-wire pattern and failed to file any SAR at all pertaining to 88 of these accounts.” Given 250 SARs that were not filed and a total fine of $625,000, that works out to a fine of $2,500 per SAR that should have been but was not filed.
This action is but one of many recent actions in which the SEC has fined brokers for failing to file SARs or filing inadequate SARs regarding suspecious penny stock deposits and liquidations. In September 2018 the SEC settled with COR Clearing for failing to file SARs; COR was fined $800,000 and it agreed to almost completely stop accepting new shares of penny stocks for deposit. In July 2018 the SEC settled with ICBCFS and Chardan Capital, primarily for failures to file SARs regarding suspicious deposits and liquidations of penny stock shares. ICBCFS was fined $860,000 and Chardan was fined $1,000,000. A year ago in April 2018 the SEC fined Aegis Capital $750,000 for failures to file SARs regarding deposits and liquidations of shares of penny stocks.