California-based broker-dealer Wedbush Securities agreed to pay $1.2 million as part of a settlement with the Securities and Exchange Commission (SEC) for the unregistered sale of microcap securities and its failure to file suspicious activity reports (SARs) associated with those transactions.
The agreement, announced Wednesday, includes a civil penalty of $1 million and payment of disgorgement and prejudgment interest of more than $207,000. Wedbush must also retain an independent compliance consultant to review its internal audit and corporate governance policies and procedures, as well as its know your customer and anti-money laundering (AML) controls.
Wedbush neither admitted nor denied the SEC’s findings.
The details: Wedbush acted as a custodian for a brokerage account held for Silverton SA, a purported Swiss asset manager that had its assets frozen as part of an SEC enforcement action in October 2018. Silverton, now known as Wintercap SA, was alleged to have enabled individuals or groups scheming to conceal their ownership of and control over public companies to fraudulently sell stock to investors on the U.S. market.
Roger Knox, Silverton’s founder, pleaded guilty in January 2020 to securities fraud and conspiracy to commit securities fraud regarding his business’s alleged schemes. His sentencing is currently scheduled for Feb. 10, 2022.
From January 2017 through September 2018, Silverton deposited nearly 98 million shares on behalf of undisclosed clients of more than 50 different low-priced microcap companies at Wedbush across 61 deposits, according to the SEC’s order. Wedbush sold all or substantially all those shares, earning a net profit of approximately $173,500.
Under federal securities laws, brokers must engage in a “reasonable inquiry” into the facts surrounding certain sales. Wedbush failed to follow its related written procedures regarding the Silverton transactions and “did not otherwise provide the employees it entrusted with the Silverton account with sufficient training as to how to identify and avoid participating in illegal unregistered offerings,” the SEC alleged. When Wedbush required Silverton to complete a deposit form for its deposits of low-priced securities, the employee responsible for reviewing the forms did not take sufficient action to determine if the securities could be lawfully offered and sold.
During the period, Wedbush had policies pertaining to the filing of SARs designed to identify transactions that involved possible illegal unregistered distributions, the SEC added. The process required warning signs be reported to the company’s sales office manager and AML compliance officer. Instead, the red flags were overlooked, and no suspicious circumstances were reported by the registered representative assigned to the Silverton account, according to the SEC.
“Broker-dealers have a critical obligation to inquire into the origin of any microcap security they sell, as well as an obligation to report suspicious activity relating to transactions in the markets,” said Gurbir Grewal, director of the SEC’s Division of Enforcement, in a press release. “It is our expectation that they will fully perform these important gatekeeping obligations, and when they fail to do so we will hold them accountable.”
Wedbush ceased accepting deposits of securities by Silverton amid regulatory scrutiny in September 2017, though the SEC noted the firm “failed to conduct any inquiry concerning Silverton’s ongoing sales of securities that had already been deposited or purchased at Wedbush, and permitted Silverton to liquidate those securities and withdraw the proceeds of those sales.”
Wedbush did not respond to a request for comment.