FINRA NAC reaches decision against C.L. King & Associates for supervisory and AML failings related to penny stock sales

On April 18, 2016 FINRA Enforcement filed a complaint (pdf) against C.L. King & Associates, Inc (hereafter referred to as C.L. King) and Gregg Alan Miller (CRD #4163500). At the times relevant to the complaint, Miller was C.L. King’s compliance manager and AMLCO (anti-money laundering compliance officer). Miller is still listed as working at C.L. King according to FINRA BrokerCheck as I write this. On September 6, 2017 a FINRA OHO extended hearing panel reached a decision (pdf) in the matter. C.L. King appealed the hearing panel decision to the National Adjudicatory Council (NAC) of FINRA, which rendered its verdict (pdf) on October 2, 2019. On November 4, 2019 that decision became final (per the firm’s detailed Brokercheck report).

There were two separate issues that the OHO extended hearing panel cited C.L. King for: survivor bonds and penny stocks. The NAC overturned the OHO extended hearing panel decision relating to survivor bonds (and they are outside the purview of this blog) so I will only discuss the penny stock issues. The NAC summary of the OHO extended hearing panel decision is a good place to start:

Separate from the firm’s survivor bond business line, CLK also sold penny stocks on behalf of two customers. One of these customers was a bank based in Liechtenstein (“PL Bank”), which sold over 41 million shares of 40 penny stocks from June 2009 through April 2014, generating proceeds of $4.87 million. The second customer, (“ABC Corp.”), sold more than 11 billion shares in 138 penny stocks from December 2012 to November 2013 and generated more than $14 million in proceeds. The Hearing Panel determined that CLK and the firm’s anti-money laundering (“AML”) compliance officer, Miller, failed to develop and implement an AML program reasonably designed to detect and report suspicious activity indicative of potential money laundering in connection with the firm’s penny stock business, as required by the Bank Secrecy Act (“BSA”). Further, the Hearing Panel found that CLK and Miller failed to conduct adequate due diligence and respond to red flags regarding the trading activities of PL Bank.

For the foregoing misconduct, the Hearing Panel censured the firm and fined it a total of $750,000. The Hearing Panel also suspended Miller for six months as a principal, fined him a total of $20,000, and ordered that he requalify as a principal before again acting in that capacity.

After reviewing the record, we reverse the Hearing Panel’s findings that CLK negligently made material misrepresentations and omitted to disclose material information to the issuers of debt securities. We otherwise affirm the Hearing Panel’s findings of liability. We also modify the sanctions as set forth in detail below.

NAC decision page 2

The NAC ended up reducing the fines somewhat and reducing Miller’s suspension, but for the most part upheld the OHO extended hearing panel’s findings:

We affirm the Hearing Panel’s findings that CLK violated NASD Rule 3010 and FINRA Rules 3110 and 2010 by failing to establish and maintain a supervisory system, including WSPs, reasonably designed to ensure compliance with the federal securities laws and FINRA rules in connection with the firm’s survivor bonds business. Accordingly, for this violation, we censure the firm and impose a $50,000 fine.

We also affirm the Hearing Panel’s findings that CLK and Miller failed to establish and implement a reasonable AML program designed to detect, investigate, and report potentially suspicious activity, and failed to conduct adequate due diligence and respond to red flags, in violation of NASD Rule 3011 and FINRA Rules 3310 and 2010. For these violations, the firm is censured, fined $292,000, and required to retain an independent consultant. Miller is suspended in all principal and supervisory capacities for three months, fined $20,000, and ordered to requalify as a principal before acting in any principal or supervisory capacity. The respondents are also ordered to pay, jointly and severally, hearing costs of $20,175.20.

NAC decision pages 57-58

In addition to the fines and the suspension for Miller, the NAC ordered C.L. King to hire a consultant to help them fix their processes and then report back:

We also order that CLK retain an independent consultant to recommend changes to the firm’s policies, procedures, and supervisory systems related to AML obligations and to review the process by which the firm enters into new lines of business. We order CLK to comply with the following procedures related to the retention of an independent consultant: CLK shall retain, within 60 days of this decision becoming FINRA’s final disciplinary action, an independent consultant, acceptable to Enforcement. The independent consultant shall conduct a review of the firm’s policies, procedures, and supervisory systems related to AML obligations and a review of the firm’s process by which it enters into new lines of business, including adopting procedures for vetting and supervising that new business. The independent consultant shall make recommendations of ways to improve these processes, policies, procedures, and systems. Once retained, CLK shall not terminate its relationship with the independent consultant without Enforcement’s written approval.

CLK shall require the independent consultant to submit to CLK and FINRA staff its report, which includes: (1) a description of the review performed and the conclusions reached; and (2) recommended changes or additions to CLK’s policies, procedures, and systems related to the firm’s AML obligations and process for vetting and supervising new lines of business. CLK shall provide to FINRA staff, within 60 days after receiving the independent consultant’s report, a written implementation report, certified by an officer of the firm, attesting to the firm’s implementation of the independent consultant’s recommendations.

NAC decision pages 56-57

C.L. King’s failures were at times quite comical:

On March 6, 2013, a CLK trader received an email from another broker-dealer, Knight Capital Americas LLC, that suggested PL Bank might be placing matched orders in CLDS. Knight asked CLK to confirm the legitimacy of the sell order. CLK’s trader forwarded the email to Miller asking, “You guys ok with me responding . . . that it’s a legitimate order?” Miller responded promptly, “Yes.” Miller acknowledged, however, at the hearing that he had not heard of the term, “matched trading.” But Miller testified that he understood that PL Bank was looking for buyers for its CLDS sell orders. The firm took no action other than to tell Swiss BD this was inappropriate. On March 6 and 7, 2013, PL Bank’s sales of CLDS constituted over 90 percent of the market volume.

NAC decision, pages 24-25

And at other times just stupefying:

For four years, Miller was oblivious to the fact that PL Bank was liquidating penny stocks for undisclosed subaccounts.

NAC Decision, page 49

Disclaimer: No position in any company mentioned and no relationship with any person or entity mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

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