A Wall Street broker-dealer is in hot water for alleged violations with respect to the sale of unregistered securities after helping customers illegally offload almost 4 billion shares of unregistered microcap stocks, according to a complaint from the Financial Industry Regulatory Authority Inc.'s enforcement unit.
From around 2009 to 2011, Aegis Capital Corp., which has around 430 brokers and 20 branch offices, allegedly failed to identify potentially fraudulent transactions that generated some $24.5 million in illicit profits from trades in unregistered penny stock securities, Finra said. The firm made $1.1 million in commissions from the transactions, according to Finra's complaint, which also names the firm's former chief compliance officers.
“Respondents failed to reasonably detect and investigate 'red flags' indicative of potentially suspicious transactions, namely: deposits of billions of unregistered shares of microcap stocks,” Finra said.
If found liable by a Finra hearing panel, the firm and the compliance officers could face fines and disgorgement of any profits, said Michael Ference, an attorney representing Aegis.
Aegis said that it planned to show that the identified transactions were exempt from registration and that its compliance department had acted responsibly, Mr. Ference said. The firm, which was founded in 1984, has been in good standing for 30 years and in three annual audits conducted from 2009 to 2011, Finra staff identified no exceptions or deficiencies in Aegis' AML program, said Mr. Ference.
“At all times, Aegis had in place a comprehensive supervisory system to review and approve transactional activity in low priced securities, including, but not limited to, conducting a searching inquiry, as well as monitoring for potentially suspicious activity and 'red flags,'” the firm wrote in a response submitted to Finra. “It is important to note that the staff has never alleged that Aegis failed to file a suspicious activity report where the filing of such [suspicious activity report] would have been appropriate.”
Finra said there were multiple signs of suspicious activity that went unreported or undetected by the compliance department. For instance, many of the shares were traded in accounts affiliated with “ML,” an unnamed investor who had a history of regulatory issues and was under a five-year ban by the SEC from participating in penny stock offerings. "ML" is not alleged to have ever been a client of Aegis.
The case against Aegis is timely because the Department of the Treasury's Financial Crimes Enforcement Network two weeks ago introduced a proposal that would enhance due-diligence requirements for legal entities, in addition to existing Finra rules, according to Amy Lynch, who consults with firms on anti-money laundering through her firm Frontline Compliance.
“What many firms tend to lack in their AML programs is mainly in monitoring accounts at the transactional level,” she said. “In this case, however, they did the bare minimum.”
Aegis' chief compliance officer at the time, Charles Smulevitz, who also served as the anti-money-laundering compliance officer, had only three and a half years of experience at the time of the alleged wrongdoing, Finra said.
Mr. Smulevitz, who was hired in 2009 at the age of 25, was referred to Aegis by the same lawyer who referred "ML" to the firm, according to the complaint.
“He was a younger person who had just gotten out of college at the time, so they could have been taking advantage of someone's inexperience,” Ms. Lynch said.
Mr. Smulevitz voluntarily resigned in 2012, according to the Finra complaint. He then went on to spend just under a year at UBS Financial Services Inc., and is now at another broker-dealer firm, Laidlaw & Co. Ltd., according to Finra registration records. Mr. Smulevitz referred requests for comment to the attorney, Mr. Ference, who said the firm's statement represented Mr. Smulevitz' position on the case.
His successor, Kevin McKenna, who also was named in the complaint, is still registered with Aegis as a supervisor and operations professional, according to Finra's complaint.