New York-based brokerage firm J.H. Darbie & Co. was charged with violations of anti-money laundering (AML) provisions of federal securities laws by the Securities and Exchange Commission (SEC) for failing to report suspicious activity regarding penny stock transactions.
J.H. Darbie failed to report suspicious activity on “tens of billions” of shares of low-priced securities, also known as penny stocks, from 2018-20, according to the SEC’s complaint filed Monday.
J.H. Darbie accepted for deposit the low-priced securities of approximately 160 issuers reflected in approximately 1,800 deposits at one of its clearing brokers and the further processing of approximately $105 million in net transaction proceeds to customers through approximately 12,000 sale transactions involving 30 billion shares of such issuers, the complaint said.
Despite having written policies and procedures for how and when to report suspicious activity reports to the Treasury Department’s Financial Crimes Enforcement Network, J.H. Darbie failed to investigate and file SARs for numerous transactions, “even when the transactions raised red flags recognized in J.H Darbie’s written anti-money laundering policies and procedures and in regulatory guidance,” the SEC said in a litigation release.
The firm also allegedly failed to create or maintain internal reports explaining why certain red flags were not further investigated. Red flags involved issuers with frequent name changes or rapidly changing business lines, the SEC said in its compliant.
“One common pattern in illicit low-priced-securities schemes is that perpetrators will take control of an existing publicly traded issuer of low-priced securities and change the name of the company and purported business prior to performing an illegal unregistered offering or pump-and-dump scheme,” the complaint said.
Other red flags included evidence of promotional activities before or during the liquidation period; unusual price fluctuations; multiple “rapid-fire” stock conversions; and the “deposit of low-priced securities with a broker, liquidation or sale of such securities, followed by the withdrawal of the proceeds.”
The SEC is seeking a judgment from the court ordering the firm to cease further violations of securities law and pay civil monetary penalties.
J.H. Darbie’s AML policies and procedures required employees to enter information into a deposit tracking system “that would automatically flag deposits by clients that aggregated to over 10 percent or 25 percent of the outstanding shares of the issuer over the previous three or six months,” the SEC alleged. Certain securities were designated as “heightened risk securities.”
The firm’s AML compliance officer was then tasked with reviewing the information and determining whether further investigation was necessary. Even if further investigation was deemed unnecessary, the firm’s policies required the decision be documented and the memo be retained in the client’s file.
The SEC said the firm did not follow its own AML policies and procedures by ignoring or failing to investigate the red flags with deposit, sale, or withdrawal activities. On 168 occasions, the firm failed to investigate or file SARs on red flags with suspicious deposits, sales, or withdrawal activities.
Broker-dealers cleared the firm’s transactions but then rejected a deposit of low-priced securities by a J.H. Darbie customer at least 74 times, but J.H. Darbie did not file a SAR or investigate any of those cases, the complaint said. In 32 instances, the firm did not file a SAR despite two or more red flags.
J.H. Darbie did not respond to a request for comment.
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