A FINRA hearing panel fined and censured a New York State-based broker-dealer for supervisory failures and misrepresentations to issuers in connection with redemptions of debt securities on behalf of a customer. Separately, the panel fined the firm and a compliance officer of the company for Anti-Money Laundering ("AML") and Bank Secrecy Act violations in connection with penny stock transactions.
The hearing panel found that C.L. King and Associates, Inc. ("C.L. King"), through its debt securities business, entered into an arrangement with a hedge fund that solicited terminally ill persons (the "participants") to open joint brokerage accounts as "joint tenants with rights of survivorship," and purchase discounted corporate debt securities with "survivor options." The hedge fund entered into agreements with the participants: in exchange for a fee, the participants would sign over ownership rights to the assets held in the brokerage accounts. Through C.L. King, the hedge fund was able to redeem the full principal amounts of the bonds before maturity after the death of a participant. The hearing panel determined that C.L. King was required to disclose to issuers of the survivor bonds that the participants were not beneficial owners of the accounts, and it failed to do so. In accordance with these allegations and related supervisory failures, the hearing panel found that C.L. King violated Securities Act Sections 17(a)(2) and (3), FINRA Rules 2010 and 3110, and NASD Rule 3010.
Unrelated to its debt securities business, C.L. King executed penny stock transactions for two large clients. The hearing panel found that C.L. King and its AML compliance officer, Gregg Alan Miller, did not implement an effective or reasonable AML compliance program, particularly with regard to penny stock transactions, and failed to adequately "detect and investigate" red flags that indicated potentially suspicious transactions. The hearing panel determined that C.L. King and Mr. Miller failed to investigate large transactions, despite the fact that the issuers of the stocks in question had generated no revenue, in addition to other indications of possible money-laundering activity. The hearing panel found that Mr. Miller and C.L. King violated FINRA Rules 2010 and 3310(a) and (b), and NASD Rule 3011(a) and (b).
To resolve the charges, C.L. King was censured and ordered to pay a total of $750,000. Mr. Miller was suspended from acting in a principal capacity for six months and ordered to pay a total of $20,000.
Subject to an appeal to the FINRA National Adjudicatory Council ("NAC"), or a review by the NAC, the decision will become final after 45 days.
Commentary / Jodi Avergun
This case is another example of FINRA action against gatekeepers, and underscores the real consequences for lawyers, compliance officers, and other key advisors if they fail in their oversight duties. SEC Chair Clayton also recently announced his intent to continue to emphasize individual responsibility and liability in SEC enforcement actions, and this FINRA action carries that agenda forward.
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