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Broker-Dealer Failed to File SARs for Pump-and-Dump Transactions

A broker-dealer was censured, fined, and ordered to retain an independent consultant in connection with failures to file Suspicious Activity Reports about pump-and-dump schemes. The SEC alleges that the firm neglected to file SARs even though it acknowledged several red flags including deposits of physical securities followed by rapid fund withdrawals, SEC investigations that led the firm to close accounts, trading away through other firms, questionable attorney opinions, and suspicious communications. The SEC acknowledges that the firm’s AML procedures identified certain red flags and how employees should report suspicious transactions, but the SEC faults the firm for failing to implement procedures, investigate red flags, and file SARs. The Bank Secrecy Act requires broker-dealers to file SARs when it suspects a transaction that has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage.

We think that FINRA and the SEC should take a hard look at the SAR filing regime. In this case, the broker-dealer appears to have facilitated several pump-and-dump schemes, and we don’t question that the SEC should have acted. What creates confusion is the leveraging of the Bank Secrecy Act and the SAR system, which was intended to combat anti-money laundering, as a catch-all reporting mechanism for any suspected regulatory violation whether or not it involved money laundering activity. Why should FinCen be involved in policing pump-and-dump schemes or other non-AML securities violations?