FINRA Reminds Brokers That They're Not Supposed To Help People Launder Money

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A while back Oppenheimer & Co. let some people trade illegally in some penny stocks and today they got in mild trouble for it, settling with FINRA over charges of selling unregistered securities, inadequate supervision, and inadequate anti-money-laundering compliance programs. Oppenheimer agreed to pay a $1.4mm fine and hire a bunch of stop-doing-that consultants to tell them to stop doing that.

The FINRA complaint is mildly amusing; its list of "red flags indicating that there may have been sales of unregistered securities1 that should have prompted further inquiry" includes "the customer had walked into a branch office with share certificates of thinly-traded securities for deposit." Not in 1920, I mean, in 2008: a customer "carried into the Newport Beach office and delivered into his new account share certificates for 255,000,000 and 500,000,000 shares of NBVG." I just love that image for its old-fashioned solidity; I've entrusted my entire life savings to some bits floating around the internet but this guy was hauling around paper stock certificates. Worth, apparently, hundreds of millions of pennies!2

Oppenheimer's own manual recommended "extreme care" in dealing with walk-in customers, which sounds about right,3 so, yes, red flag. There are others in the complaint, including delightfully that "the Oppenheimer financial advisor for [one dodgy] account was directed by another customer to an online discussion that characterized [that dodgy customer] as a 'con artist' and a 'scam artist,'" which does sound bad.4 Ignoring those red flags got Oppenheimer done for, among other things, insufficient anti-money-laundering compliance.

One of the stranger things in the insider trading case against SAC Capital is that it is really a money laundering case, at least in its interesting bits. The forfeiture complaint against SAC is premised on the theory that all of SAC's legitimate activities served to launder SAC's illegal profits from its insider trading.5 The fact that that theory is bonkers doesn't stop it from being the theory; here is a good Bloomberg article basically quoting (1) a bunch of people saying "the government really does think that they should be able to take $14 billion from SAC if there's, like, $10,000 worth of insider trading" and (2) a bunch of other people saying "but that's pretty nuts."

If that's really the government's theory shouldn't it trouble the banks? I mean, the thing is:

  • You're supposed to stop money laundering by your customers.
  • Especially if there are red flags.

If walking around with paper stock certificates is a red flag, how about a criminal indictment claiming that all of your trading constitutes money laundering? I mean, orange at least? Reddish orange? DealBook last week had a series of squirmy answers from anonymous bank executives about why they're still trading with SAC:

Bank executives reason that it would be unfair to terminate a relationship based on accusations. The fund said that it “has never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously.” ...

There is also, in some executives’ views, little that is new contained in the indictment. Prosecutors still have not charged Mr. Cohen, who owns 100 percent of the firm. They also note that of the eight former SAC employees accused in the filing of insider trading, seven were previously known, with six having already pleaded guilty.

Well that doesn't help! "Oh, we didn't think the indictment for insider trading and money laundering was a big deal, since we basically knew about it all already." Maybe the seven previous indictments were the red flags.

I dunno. It's pretty tough to imagine the government actually coming after the banks who trade with SAC for facilitating money laundering, in part because that seems unnecessarily cruel to the banks and in part because it puts even more weight on what is already a pretty nutty theory. Still it just feels weird to me. The whole case against SAC is about how the firm ignored red flags of insider trading; if you're a bank how can you get comfortable ignoring red flags like oh say criminal indictments? And if the government isn't going to blame the banks for facilitating SAC's money laundering - because, say, it doesn't really believe that SAC's trading constitutes money laundering - then why bring the money laundering claims in the first place?

FINRA Fines Oppenheimer & Co., Inc. $1.4 Million for Sale of Unregistered Penny Stocks and Anti-Money Laundering Violations [FINRA & complaint]
SAC Seen Avoiding $14 Billion Death Penalty From U.S. [Bloomberg]
Hiring of Fired Trader Offers a Glimpse Into SAC’s Practices [DealBook]

1."You don't register shares, you register transactions," securities lawyers wail hopelessly at FINRA, which ignores them, sorry.

2.Not really; NBVG - NutriPure Beverages Inc. - currently trades, or doesn't trade, at about $0.0001, so hundreds of millions of hundredths of pennies. In '08-'09, when this went on, it spiked as high as $0.30, which is real money, though the customer seems to have sold it in April and May of '09, when the peak seems to have been about a ha'penny.

3.So obviously I cannot really imagine a person, like, walking into a strip-mall brokerage office in the twenty-first century and being all "hi I have some stocks in my pocket and would like to trade them." But even without the stocks in your pocket - who has both the money and desire to set up a brokerage account but does it by walking in to a storefront brokerage? Everyone knows that the American way of setting up a brokerage account is via cold call.

4.Eh. I posit that it is the work of fifteen seconds to find an online discussion that characterizes, say, Goldman Sachs, or JPMorgan, as a "con artist" and a "scam artist,"a though I'm not actually going to go do it, that sounds horrible.

a.I mean. With somereason.

5.Really! Really-ish:

The criminal conduct of the SAC ENTITY DEFENDANTS ... continued when the illicit profits from insider trading were knowingly commingled with other capital in the SAC INVESTMENT FUNDS; used to promote further trades based on Inside Information; and transferred to SAC employees, in the form of bonus payments, with the assistance of financial institutions. Through this course of conduct, the SAC ENTITY DEFENDANTS engaged in and were involved in money laundering, and involved the SAC INVESTMENT FUNDS in their money laundering scheme.

Emphasis added.

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