FINRA Fines Three Firms Over $1.25 Million for Failing to Detect, Investigate and Report Suspicious Transactions in Penny Stocks
J.P. Turner, Park Financial, Legent Clearing Ignored Indications Customers May Have Been Engaged in Illegal Conduct
Two Individuals Barred from Securities Industry, One Suspended and Fined
Washington, DC — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined three broker-dealers — J.P. Turner & Co., of Atlanta, Park Financial Group, Inc., of Maitland, FL, and Legent Clearing, LLC, of Omaha — for failing to implement reasonable anti-money laundering (AML) compliance programs, including the failure to detect, investigate and report instances of potentially suspicious transactions in low-priced stocks.
J.P. Turner was fined $525,000, Park Financial was fined $400,000 and Legent Clearing was fined $350,000. In addition, two individuals — Park Financial's former CEO and AML compliance officer Gordon Charles Cantley and J.P. Turner equity trader John McFarland — were barred permanently from the securities industry. David Farber, a Park Financial equity trader, was fined $25,000 and suspended in all capacities for 30 days. S. Cheryl Bauman, J.P. Turner's former AML compliance officer, was fined $30,000 and suspended from acting as a principal in a securities firm for 18 months, while Robert Meyer, a former J.P. Turner branch manager, was fined $5,000 and suspended as a principal for one month.
"It is critical that firms promptly and fully investigate and report suspicious transactions - because law enforcement agencies and the Securities and Exchange Commission use Suspicious Activity Reports to investigate and prosecute money laundering, securities fraud and other financial crimes," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. "Each of these firms had inadequate AML procedures and each of these firms processed suspicious trades without adequately following up on red flags — such as deposits and liquidations of large quantities of penny stocks by customers or the principals of the issuing firms that had a history of securities fraud or stock manipulation."
The Bank Secrecy Act and FINRA rules require all broker-dealers to design and implement programs to detect and report suspicious transactions at, by or through the firm. The program must be tailored to the risks of the firm's business. For such transactions to be reportable, the firm does not need actual knowledge that the customer is in fact committing a crime or that the funds are the proceeds of a crime.
In each of the three cases announced today, the firms failed to establish and/or implement reasonable procedures to detect and report suspicious trading in low-priced securities. Certain trading in low-priced securities, or "penny stocks," creates a risk that these securities can be used by unscrupulous issuers of the stock, stock promoters and others affiliated with the issuers for money laundering or to commit securities fraud or market manipulation. These firms failed to detect and investigate potentially suspicious transactions. Many of the transactions in these cases presented sufficient red flags that the firms should have had reason to suspect that the customers may have been engaged in unregistered distributions, market manipulation or securities fraud.
In the case against Park Financial, FINRA found that during the period from September 2004 through April 2008, the firm's clientele included several stock promoters and other individuals and entities with regulatory histories of securities-related violations such as stock fraud and manipulation. Many of these customers engaged in high-risk activities, such as depositing millions of shares of low-priced securities, generating millions of dollars in proceeds by liquidating the shares and wiring out the proceeds to offshore and domestic bank accounts. Other Park Financial customers had inflows of funds or other assets into their accounts that were well beyond their known income or financial resources. Park Financial, acting through Cantley, failed to establish and/or implement reasonable procedures to detect and report suspicious trading, failed to investigate any of the potentially suspicious transactions and failed to file Suspicious Activity Reports, as appropriate.
FINRA also found that Park Financial, acting through broker Farber, had engaged in the unregistered distribution of the securities of two issuers. In addition to imposing a fine, FINRA ordered the firm to retain an independent AML consultant to review its AML compliance program.
In a second action, FINRA found that J.P. Turner failed to detect, investigate and file Suspicious Activity Reports as appropriate for numerous potentially suspicious transactions. The suspicious activity included: multiple accounts under a single name or multiple names maintained by customers for no apparent business reason; and numerous transactions where large blocks of low-priced securities of companies with higher risk operating and financial histories were transferred into accounts, sold and the proceeds wired from the accounts. In several cases, the principals of these companies were the subjects of pending SEC actions alleging fraud and other securities law violations.
FINRA also named J.P. Turner's former equity trader, McFarland, for failing to report to his firm suspicious transactions. Former Staten Island Branch Manager Meyer was named along with Bauman for their failures to adequately monitor and enforce special supervisory arrangements for the Staten Island branch.
In the third action, FINRA found that Legent Clearing's AML program was not tailored to the firm's business risks in that it did not adequately consider the money laundering risks posed by correspondent firms for which Legent provided securities clearing services. FINRA found that Legent failed to consider, among other things, that some of the correspondent or introducing firms had lengthy disciplinary histories and were conducting high-risk business activities such as significant penny-stock liquidations.
Even more problematic, Legent processed transactions for individual customers of its correspondent firms with red flags of suspicious activity, without fully investigating the transactions or filing a Suspicious Activity Report as appropriate. For instance, Legent processed transactions involving millions of shares of stock owned by company insiders or known penny stock promoters who had no evident legitimate business purpose for engaging in those transactions. Notably, Legent provided clearing services to introducing broker-dealers that FINRA has expelled from the securities industry for their own AML violations — Salomon Grey Financial in 2006 and Franklin Ross in 2007.
In settling these matters, J.P. Turner, Park Financial, Legent Clearing, Gordon Charles Cantley, John McFarland, David Farber, S. Cheryl Bauman and Robert Meyer neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2008, members of the public used this service to conduct 11.6 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
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