by Howard Haykin

Aegis Capital Corp. agreed to settle FINRA and SEC charges over the way it handled "red flags" or suspicious activity connected to its sale of low-priced securities. Aegis will pay fines of $550,000 and $750,000, respectively, to FINRA and the SEC, and it will retain a compliance expert. Aegis, a New York, NY-based broker-dealer that’s been in business since 1984, conducts retail and institutional business through a workforce of 400 registered persons who operate out of 20 branch locations.

FINRA FINDINGS.    Between January 2012 and April 2014 (the "Relevant Period"), Aegis failed to adequately monitor or investigate any trading in customers’ RVP/DVP accounts, including low-priced securities transactions. In particular, the Firm failed to adequately monitor or investigate the trading in 7 different DVP customer accounts that, during the Relevant Period, liquidated billions of shares of low-priced securities in 8 issuers. The customers generated millions of dollars in proceeds in connection with these transactions.

As far as Aegis’ annual AML Training Program was concerned, while the firm required all employees to complete a computerized training module that included training on AML issues, none of these modules included any discussion of the red flags associated with low-priced securities transactions.

CURRENT SEC FINDINGS.    From at least late 2012 through early 2014, Aegis failed to file Suspicious Activity Reports (“SARs”) on hundreds of transactions when it knew, suspected, or had reason to suspect that the transactions involved the use of the broker-dealer to facilitate fraudulent activity or had no business or apparent lawful purpose. Many of the transactions involved red flags of potential market manipulation, including high trading volume in companies with little or no business activity during a time of simultaneous promotional activity.

Throughout the relevant period, senior Aegis personnel became aware of transactions that exhibited numerous AML red flags through alerts from its clearing firm. All of these “AML Alerts” were sent directly to Aegis’ AML Compliance Officers (“AML COs”) who were: (i) per Aegis’ WSPs, responsible for filing SARs on the firm’s behalf; and, (ii) the primary point of contact for the clearing firms as it related to suspicious activity.

Compounding the issue is that Aegis did not even create written analyses or compile other records indicating that it had considered filing SARs. Rather, Aegis closed some accounts due at least in part to suspicious activity while neglecting to file a SAR for that activity and did not investigate why its own surveillance systems failed to detect the suspicious activity.

So, as the SEC concludes, Aegis’ failure to file SARs went beyond its inadequate systems to surveil for suspicious activity. Accordingly, the SEC charged three individuals in separate complaints - the firm’s founder and CEO, and two individuals who consecutively served as AML Compliance Officer (“AMLCO”) of Aegis. [Financialish will soon post a story on these complaints.]