Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that it has expelled Franklin Ross, Inc. (FRI) of Princeton, NJ from FINRA membership for repeatedly violating anti-money laundering (AML) rules. FINRA also imposed fines and suspensions against two of the firm's principals - its former president, Mark G. Ross, Jr., and its current president, Kevin K. Herridge. By federal statute, a firm must be a FINRA member in order to conduct a public securities business.
FINRA found that FRI repeatedly violated anti-money laundering (AML) rules by, among other things, failing to investigate and report numerous suspicious transactions; failing to obtain adequate background information on new customer accounts; failing to conduct an independent test of its AML program; and failing to provide AML training. FRI and Ross also violated supervisory, recordkeeping and registration provisions.
"Suspicious Activity Reports provide law enforcement with information that is critical for investigating and prosecuting money laundering, terrorist financing and other financial crimes," said Susan Merrill, FINRA Executive Vice President and Chief of Enforcement. "FRI's failures to investigate red flags allowed it to serve as a 'safe haven' for individuals seeking to capitalize on highly suspicious or illegal stock transactions without detection."
AML rules, as well as FRI's written procedures, mandated that the firm - under the direction of its AML Compliance Officers (Ross and then Herridge during the relevant period) - investigate "red flags" indicating possible suspicious activity and then file Suspicious Activity Reports (SARs) for suspicious customer activity and transactions. Notwithstanding the continuous pattern of suspicious activity presented by a number of the firm's customers, FRI, Ross and Herridge never complied with this important AML program requirement.
FINRA found that, at various times from February 2004 through September 2006, FRI's clientele included notorious stock promoters and others who had been barred by FINRA or disciplined by the Securities and Exchange Commission (SEC) or had criminal histories - including one customer who had been convicted for the sale of an illegal controlled substance and money laundering. The same individual had been previously convicted for his role in a "smurfing" scheme, a commonly-used money laundering technique involving the splitting of a large financial transaction into smaller transactions to avoid scrutiny by regulators and law enforcement.
FINRA further found that in at least a dozen instances, FRI customers sold large blocks of penny stocks that were linked to allegedly fraudulent schemes. The SEC had filed at least two enforcement actions charging federal securities laws violations involving penny stocks that were later sold through FRI and other firms. In one instance, an individual who had previously been barred by FINRA delivered over 1.8 billion shares of a penny stock issued by a company that was contemporaneously the subject of a pending, and publicly released, SEC complaint alleging manipulation and other securities laws violations. In the following 10-month period, this customer sold the shares for approximately $8 million in 155 separate sales, wiring the proceeds out of his account after each sale.
FINRA also found that certain larger securities transactions effected through FRI had many hallmarks of suspicious activity, including journaling of securities into accounts followed by immediate liquidation, as well as numerous unexplained wire activities in customers' accounts that included wires to known tax havens. In some instances, customers deposited securities and/or funds into accounts that greatly exceeded their known income or resources.
FINRA found that FRI should have identified these transactions as suspicious. FRI had tools at its disposal to identify the transactions. For example, FRI's clearing firm provided it with exception reports that could have been used to detect many of the red flags. FRI, however, did not utilize those reports and never conducted an appropriate investigation or reported any of this activity. During the relevant period, FRI's annual gross revenues grew from approximately $500,000 to $2.5 million.
FINRA also found that FRI and Ross violated supervisory, recordkeeping and registration provisions. For example, they failed to properly review the transactions and correspondence of the firm's registered representatives and conduct inspections of branch offices. Moreover, they allowed certain individuals who were not actively involved in the firm's securities business to "park" their securities registrations with FRI.
In addition, FINRA found that FRI failed to maintain and preserve internal e-mail communications relating to the firm's business as required by the federal securities laws and FINRA rules. From at least January 2004 through November 2005, FRI had no system, written procedures or policies relating to retention of electronic communications. Indeed, the firm did not maintain a central server for such communications. Instead, its registered representatives used their personal e-mail accounts to transmit business-related messages to firm customers. As a result, FRI failed to maintain and preserve any electronic communications during that period. From November 2005 through March 2006, FRI also failed to enforce, with respect to the one representative in its Sarasota, FL branch office, its policy prohibiting the use of external e-mail accounts for business-related e-mails. As a result, many business-related e-mails sent to and from the Sarasota branch office were not otherwise retained by the firm.
In addition to expelling the firm, FINRA suspended Ross for two years in a principal capacity and 90 days in all capacities and fined him $35,000. FINRA suspended Herridge for six months in a principal capacity and 30 days in all capacities and fined him $25,000. FINRA also ordered both individuals to obtain substantial additional AML training over the next two years.
In concluding this settlement, FRI, Ross and Herridge 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 BrokerCheck (formerly known as NASD BrokerCheck). FINRA makes BrokerCheck available at no charge. In 2006, members of the public used this service to conduct more than 4.7 million searches for existing brokers or firms and requested more than 207,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.finra.org/brokercheck. Investors can also access this service by calling (800) 289-9999.
FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business with the U.S. public. Created in 2007 through the consolidation of NASD and NYSE Member Regulation, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business - from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.finra.org.
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