“Juvenal” Delinquent Agrees to Securities Industry Ban, Fine for Gatekeeping Failures

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“Quis custodiet ipsos custodes?” Juvenal, an ancient Roman poet, asked this question in his second-century Satires, when he pondered who would be charged with “guarding the guards.” The SEC indicated that its Enforcement Division is quite willing to undertake that task, as a former chief compliance and anti-money laundering (AML) officer for a broker-dealer agreed to a securities industry ban for his failure to properly respond to nearly $25 million worth of suspicious transactions.

As charged by the SEC, Meyers Associates, a New York-based broker-dealer, did not file suspicious activity reports (SARs) as required by statute and SEC rules. John David Telfer, the firm's chief compliance offer, was personally responsible for ensuring that the firm filed all required SARs with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

The violations at issue related to the firm's penny stock liquidation business, where it routinely accepted physical deposits of large blocks of penny stock shares and liquidated them. Customers would then transfer the sale proceeds out of their accounts. According to the SEC, the firm’s written AML program identified this particular pattern of conduct as a “red flag” that should trigger additional investigation as to whether a SAR filing would be necessary. Despite the AML program requirements, however, Telfer allegedly performed no investigation into any of the suspicious transactions. The SEC also charged that the shares involved could not be sold legally because they were not registered under the Securities Act and no registration exemption was available.  Rather than conduct a reasonable inquiry into the deposits, the firm allegedly accepted the customers’ claimed registration exemptions at face value.

The suspicious trading occurred in accounts controlled by microcap stock financiers Raymond H. Barton and William G. Goode. The SEC separately charged these individuals and others with conducting a pump and dump scheme.

The transactions also presented other indications that Barton and Goode were engaged in a fraudulent scheme, including: 

  • previous securities fraud incidents by the customers or affiliated parties;
  • inconsistencies between customer representations and the documentation submitted to the firm;
  • possible forged documents;
  • the acquisition of shares at very large discounts;
  • changes in the issuers’ business models, including new business ventures relating to illegal industries, such as marijuana production and distribution;
  • excessive promotional activity in the traded securities;
  • trading into sudden spikes in price and volume; and
  • coordinated deposit and trading activities between one or more customer accounts.

The SEC alleged that various parties, including his employer’s clearing firm, brought these red flags directly to his attention, Telfer still knowingly or recklessly failed to file the required SARs with FinCEN. Telfer consented to the entry of an industry bar order, and agreed to pay a $10,000 civil penalty, without admitting or denying wrongdoing.

“The SEC’s Broker-Dealer Task Force AML initiative is focused precisely on the conduct charged against Meyers Associates, which we allege systematically flouted its obligations under the securities laws to report suspicious activity,” said Andrew M. Calamari, director of the SEC’s New York Regional Office and Co-Chair of the Enforcement Division’s Broker-Dealer Task Force.  He added that “when other brokerage firms were rejecting similar deposits by Barton and Goode, Meyers Associates not only effectuated their illegal stock sales but then failed to report them as required by law.”

Juvenal may rest comfortably, because, according to a free online English to Latin translator, sequitur tenor Commissionis custodiens cum custodibus.