On October 23, 2019 BNP Paribas Securities Corp. agreed to a $15 million fine and censure from FINRA for failings relating in part to accepting penny stock shares for deposit and liquidation. The 13-page Acceptance, Waiver, and Consent (AWC) (pdf) makes for some fun reading. Readers of this blog will be used to reports of fines from FINRA and the SEC for brokers that fail to do proper due diligence before allowing the liquidation of large blocks of shares of penny stocks or fail to file Suspicious Activity Reports (SARs), but the failings outlined in this AWC are among the worst I have seen in recent memory.
Following are excerpts from the AWC showing BNP Paribus’ failings with regard to penny stocks:
… BNP did not implement any systems or written procedures (“WSPs”) to determine whether resales of securities complied with Section 5’s registration requirements, even though a substantial portion of its business involved liquidating restricted shares of penny stocks deposited in certificated form.
As a result, BNP allowed the deposit of nearly 31 billion shares of penny stocks, with a notional value of approximately $338 million, without any review to determine whether the shares were restricted, qualified for an exemption from registration, held by control persons of the issuer, or otherwise eligible for re-sale. BNP also facilitated the removal of restrictive legends from 33.5 million shares of securities, with a total notional value of approximately $12.5 million, without conducting any review to determine whether the legends were eligible for removal.
It isn’t just that the review prior to removal of restricted legends was inadequate but that there was no review! Likewise, surveillance of penny stock transactions was not just inadequate — for a long time, there was no surveillance:
It did not conduct any surveillance targeting penny stock transactions, or transactions in securities trading outside of the traditional exchanges, until early 2016
Next, take a look at BNP’s failures to identify red flags that might have triggered the filing of SARs:
Because of these deficiencies in its AML Program, BNP did not identify red flags of potentially suspicious activity that may have required the filing of a suspicious activity report (“SAR”). For example, during the Relevant Period, BNP:
• did not identify 14 customer accounts that executed zero buy transactions while selling approximately 1 billion shares of low priced securities for proceeds of approximately $3.5 million;
• did not identify multiple accounts in which known toxic debt financiers engaged in sales of penny stocks representing more than 20% to 80% of the trading volume on the sale dates and involving securities that were the subject of negative news or suspicious promotional campaigns; and
• did not review at least 3,448 foreign currency wires representing a total value of more than $2.5 billion USD to determine whether they involved high-risk entities or jurisdictions, or represented the proceeds of potentially suspicious trading activity.
A retroactive review of penny stock transactions from April 2013 to April 2016 “identified more than one hundred instances where BNP did not reasonably detect and investigate potentially suspicious penny stock transactions that may have required the filing of a SAR.”
The AWC gives examples of suspicious wire transfer patterns that BNP did not review:
• 34 customer accounts that, during the period of February 2013 to May 2015, received more than 18 billion restricted shares of penny stocks and incoming wires totaling $40,344, while sending 220 outgoing wires that totaled more than $62 million during a 23-month period; and
• 44 customer accounts that, during the same period, executed zero buy transactions while depositing more than 17.8 billion shares of penny stock and wiring out more than $69 million in sale proceeds.
BNP Paribus was also slow to fix its problems even after they were identified internally:
In January 2014, the head of BNP’s Trading Operations advised senior management that BNP was “an outlier in the industry” in terms of its surveillance of microcap securities and recommended that BNP develop and implement specific policies, procedures and controls for penny stocks. In February 2014, BNP personnel raised additional concerns with BNP’s penny stock business and due diligence process after reviewing recent AML regulatory actions.
BNP did not act in a timely manner to address the deficiencies its personnel identified. BNP did not implement procedures relating to penny stocks or enhanced due diligence for physical certificates until March 2015, more than one year after the head of its Trading Operations identified the need.
In addition to the fine, BNP Paribus Securities Corp also consented to the imposition of a censure and a requirement to get its procedures up to an acceptable level within 90 days. I am actually a little surprised that BNP Paribus Securities Corp did not also exit the penny stock deposit business like Cor Clearing did in the wake of an SEC settlement a year ago.