DENISE COTE, United States District Judge.
Procedural History ... 405
Background ... 406
I. The Low-Priced Securities Market...406
II. Alpine's Business ...408
III. 2011-2012 FINRA Examination...408
IV. Alpine's Improvements of its AML Program and SAR Filing Program ... 409
V. 2014 OCIE Examination ...410
Discussion ...410
V. Deposit-and-Liquidation Patterns...440
VI. Late-Filed SARs ...443
VII. Failure to Maintain Support Files...443
Plaintiff United States Securities and Exchange Commission ("SEC") has sued clearing broker Alpine Securities Corporation ("Alpine"), alleging that between the years 2011 and 2015 Alpine repeatedly filed deficient suspicious activity reports ("SARs") and failed altogether to file other SARs and to maintain support files for SARs when required by law to do so. The SEC asserts that this conduct violated 17 C.F.R. § 240.17a-8 ("Rule 17a-8"), which obligates a broker-dealer to comply with certain regulations promulgated under the Bank Secrecy Act ("BSA"), including 31 C.F.R. § 1023.320 ("Section 1023.320"), which dictates when a broker-dealer must file SARs.
The SEC has moved for summary judgment as to liability on thousands of violations of Rule 17a-8. For the reasons that follow, the SEC's motion is granted in part.
The SEC filed this action on June 5, 2017. Following an unsuccessful effort to dismiss the action for lack of personal jurisdiction and improper venue, Alpine answered the complaint on September 29, 2017. It filed an amended answer on October 27.
As invited by the Court, the parties made preliminary summary judgment motions to articulate the legal standards that govern the SEC's claims and Alpine's defenses. The SEC moved for partial summary judgment on December 6, 2017, submitting thirty-six SARs under seal as examples of four categories of purported Rule 17a-8 violations. Alpine cross-moved for summary judgment and for judgment on the pleadings on January 19, 2018. Alpine declined the opportunity to submit additional SARs for review in connection with the SEC's motion. Alpine's motions principally argued that the SEC does not have jurisdiction to bring this action and that the SEC's complaint was deficient for failing to plead that Alpine acted with wrongful intent. An Opinion of March 30, 2018 (the "March Opinion") denied Alpine's motions and granted in part the SEC's motion.
On June 22, 2018, Alpine and its affiliate, Scottsdale Capital Advisors ("SCA"),
Following the conclusion of discovery, the SEC filed this summary judgment motion on July 13. The motion became fully submitted on September 14.
Much of the relevant factual and regulatory background is recited in the March Opinion. Familiarity with the March Opinion is assumed.
The SAR transactions at issue involve penny stocks and microcap stocks.
The markets for these low-priced securities ("LPS") have long been the subject of congressional and regulatory scrutiny due to the unique characteristics of those markets. In 1990, Congress enacted the Penny Stock Reform Act of 1990.
The SEC has promulgated rules pursuant to the Penny Stock Reform Act. It revised those rules in 2005 in order to better combat "fraudulent sales practices" and "the diversion of substantial capital to unscrupulous promoters and broker-dealers" in the LPS markets.
Financial regulators frequently warn investors about the risks of fraud connected to investments in LPS. The SEC, for instance, has observed that "information about microcap companies can be extremely difficult to find, making them more vulnerable to investment fraud schemes and making it less likely that quoted prices in the market will be based on full and complete information about the company." SEC, Microcap Stock.
The SEC has explained in an administrative decision that "[p]enny stocks present risks of trading abuses due to the lack of publicly available information about the penny stock market in general and the price and trading volume of particular penny stocks."
As noted, a frequent tool of market manipulation is the use of shell companies.
Alpine does not dispute these risks of investing in the LPS markets. Alpine points out, however, that these markets provide access to capital for smaller companies.
Alpine is a clearing broker. Clearing brokers provide clearance and settlement services for introducing brokers. This involves handling the recording of transactions, the exchange of funds, and the delivery of securities after a transaction has been executed. Clearing firms typically maintain records of all trading and issue trade confirmations and statements.
Alpine was founded in 1984. In early 2011, Alpine was acquired by its current owner.
Alpine is regulated by FINRA and other regulators. Between March 2, 2011 and January 22, 2012, FINRA conducted a financial, operational, and sales practices examination of Alpine. FINRA conducted an exit meeting with Alpine on July 23, 2012, where it shared its highly critical findings with Alpine. FINRA issued a seven-page report of that examination on September 28, 2012 ("FINRA Report").
The FINRA Report listed ten exceptions to Alpine's practices, five of which have particular relevance to the issues raised in this lawsuit. The FINRA Report discloses that Alpine did not file any SARs for over six months in 2011 — March 1 through May 10 and August 16 through December 19 — and found that Alpine was not in compliance with a FINRA SAR reporting rule and two federal reporting regulations, including Section 1023.320.
The FINRA Report also determined that the narrative sections of the 823 SARs that Alpine did file during the period March 7, 2011 through January 22, 2012 were "substantively inadequate" and in violation of Section 1023.320(a)(1). It explained that
The FINRA Report recited the "two basic formats or templates" that Alpine had used in these SARs, "neither of which were substantively adequate as they failed to fully describe why the activity was suspicious." As quoted in the FINRA Report, the first boilerplate, barebones narrative read:
The second read:
The FINRA Report notes that the first template was used in 559 SARs and the second template was used in 264 SARs.
The FINRA Report also criticized Alpine for failing to review requests from FinCEN for information, and for the inadequacies in its AML program, including the program's failure to detect and report suspicious activity. As disclosed in the Report, Alpine had failed to enforce its own AML procedures, including the requirement that it file a SAR within thirty days of becoming aware of a suspicious transaction.
In response to the FINRA examination, Alpine filed 251 SARs between December 2011 and May 2012 for transactions that had occurred between August 17, 2011 and February 3, 2012, and for which it had previously filed no SARs. Alpine explains in opposition to this motion for summary judgment that it filed these SARs only because FINRA informed Alpine that it expected to see SARs filed on all transactions involving large deposits of LPS. The SEC contends that Alpine violated Rule 17a-8 by failing to file these SARs within the thirty-day period imposed by Section 1023.320(b)(3). These SARs will be referred to as the Late-Filed SARs.
In response to this motion for summary judgment, Alpine freely acknowledges that before the change in ownership in 2011, Alpine had had only limited compliance staff. Alpine's current owners hired more compliance personnel in 2011 and 2012. Beginning in the Fall of 2012, Alpine arranged for an annual audit of its AML program. Also in 2012, Alpine created standard operating procedures for compliance with AML regulations. Alpine has submitted three versions of its AML procedures, dated April 11, 2013, August 29, 2014, and October 1, 2015.
The SEC's motion for summary judgment is premised in part on 1,593 SARs that Alpine filed and which the SEC contends contain deficiencies in their narratives. Of those 1,593 SARs, approximately two-thirds were filed before September 28, 2012, when Alpine received the FINRA Report.
The following is the narrative section of SAR 1763, which is one of the post-FINRA Report SARs at issue here. It was filed in September 2013, approximately one year after the FINRA Report. It reads:
The SEC contends that this SAR narrative is deficient for failing to disclose (a) basic customer information, (b) that the deposit
The SEC Office of Compliance Inspections and Examinations ("OCIE") conducted a one-week on-site review of Alpine in July 2014. OCIE reviewed 252 of the over 4,600 SARs filed by Alpine between January 2013 and July 2014, and concluded in a report issued on April 9, 2015 ("OCIE Report") that 50% of those 252 SARs "failed to completely and accurately disclose key information of which [Alpine] was aware at the time of filing." OCIE found that the narrative sections of Alpine's SARs "generally contained `boilerplate' language." It criticized Alpine for omitting mention of many red flags for suspicious activity, such as a customer's civil, regulatory, or criminal history; foreign involvement with the transactions; concerns about an issuer; stock promotion activity; and that an issuer had been a shell company. In bringing this lawsuit, the SEC relies on the existence of these red flags in Alpine's support files for the SARs Alpine filed.
(Footnotes omitted.)
The OCIE Report also noted that Alpine filed SARs on certain customers' deposits of LPS but "[i]nexplicably" failed to file SARs when those customers sold those LPS. The OCIE Report describes Alpine's failures as "recidivist activity" because of FINRA's 2012 findings that Alpine was filing substantively inadequate SARs. It concluded that Alpine's SAR practices "obscured the true nature of the suspicious activity," and that it appeared that Alpine was "intentionally trying to obfuscate or distort the truly suspicious nature of the activity that the Firm is required to report to law enforcement."
The SEC seeks summary judgment as to Alpine's liability for several thousand violations of Rule 17a-8. The SEC's motion is largely addressed to four discrete alleged
"Summary judgment is appropriate only where there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."
When the moving party has asserted facts showing that it is entitled to judgment, the opposing party must "cit[e] to particular parts of materials in the record" or "show[ ] that the materials cited [by the movant] do not establish the absence ... of a genuine dispute" in order to show that a material fact is genuinely disputed. Fed. R. Civ. P. 56(c)(1). "A party may not rely on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment," as "[m]ere conclusory allegations or denials cannot by themselves create a genuine issue of material fact where none would otherwise exist."
This case concerns the interplay of regulations promulgated under two federal statutes: the BSA, 31 U.S.C. § 5311,
Rule 17a-8 was promulgated by the SEC in 1981 under authority delegated to it by Congress in the Exchange Act. See March Opinion, 308 F.Supp.3d at 796. The Rule requires a broker-dealer to "comply with
The reporting and record-keeping requirements found in Chapter X of Title 31 of the Code of Federal Regulations and incorporated by Rule 17a-8 include Section 1023.320, which, among other things, requires a broker-dealer to file SARs. Section 1023.320 states in pertinent part:
31 C.F.R. § 1023.320(a) (emphasis supplied).
The regulation also provides that a SAR must be filed
31 C.F.R. § 1023.320(b)(3) (emphasis supplied).
In addition, a broker-dealer is required to retain support files for SARs for five years, as follows:
31 C.F.R. § 1023.320(d) (emphasis supplied).
SARs are currently submitted to FinCEN via an electronic SAR Form.
Part II of the SAR Form requires the filer to identify the suspicious activity being reported. A filer must provide the date or date range of suspicious activity and the dollar amount involved. In addition, there is a list of financial instruments, such as "Bonds/Notes," "Stocks," and "Other securities." 2002 SAR Form at 1.
The SAR Form also contains directions for SAR filers about how to complete the narrative portion of the SAR.
(Emphasis in original.) The checklist has twenty-two items, each addressed to a specific type of information. The following items are particularly relevant to the SEC's motion for summary judgment:
2002 SAR Form at 3.
FinCEN has issued a number of guidance documents explaining the scope of the SAR reporting duty in the narrative section of the SAR Form. FinCEN guidance interpreting Section 1023.320 is entitled to deference.
The SAR Narrative Guidance was issued by FinCEN in 2003 with the "purpose" of "educat[ing] SAR filers on how to organize and write narrative details that maximize[ ] the value of each SAR form." SAR Narrative Guidance at 1. This "guidance document" describes in detail the Five Essential Elements of a SAR narrative, describes how a SAR narrative should be structured, and provides examples of sufficient and insufficient narratives for each type of filing entity.
The "who" of the Five Essential Elements encompasses the "occupation, position or title..., and the nature of the suspect's business(es);" the "what" includes "instruments or mechanisms involved" such as wire transfers, shell companies, and "bonds/notes;" and the "why" includes "why the activity or transaction is unusual for the customer; consider[ing] the types of products and services offered by the [filer's] industry, and the nature and normally expected activities of similar customers."
Examples of relevant information listed by FinCEN include "bursts of activities within a short period of time," SAR Narrative Guidance at 5, whether foreign individuals, entities, or jurisdictions are involved, 2012 SAR Instructions at 112, or the involvement of unregistered businesses, SAR Narrative Guidance at 5. A common scenario identified by FinCEN as suspicious involves a "[s]ubstantial deposit... of very low-priced and thinly traded securities" followed by the "[s]ystematic sale of those low-priced securities shortly after being deposited."
Broker-dealers are also required by regulation to maintain written AML policies that define how the broker-dealer detects potential money laundering and implements the duty to file SARs. This requires broker-dealers to engage in "ongoing customer due diligence," which includes
31 C.F.R. § 1023.210(b)(5).
In 2002, FinCEN delegated its BSA authority over broker-dealer AML programs to the SEC and SROs including FINRA.
The SEC makes four categories of claims, each of which is separately addressed below. It asserts that Alpine filed SARs that failed to report in their narrative sections one or more of seven different types of information. It then asserts that Alpine failed to file SARs reporting suspicious sales following large deposits of LPS. The third set of claims concerns SARs that the SEC asserts were filed later than allowed by Section 1023.320. Finally, the SEC asserts that Alpine violated the law by not maintaining support files for many of the SARs it filed. Before addressing the specific violations on which the SEC seeks summary judgment, this Opinion addresses Alpine's general arguments about the propriety of this action.
Alpine contests whether the SEC has authority to bring this suit.
Alpine is correct that FinCEN has not expressly delegated BSA enforcement authority to the SEC. But, that ignores the separate statutory authority at issue here. The SEC has its own independent authority to require broker-dealers to make reports, and has enforcement authority over those broker-dealer reporting obligations. It was efficient for the Treasury Department to delegate its own duty to examine broker-dealers to the agency primarily responsible for regulating broker-dealers.
The Exchange Act requires broker-dealers to "make ... such reports as the Commission ... prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of [the Exchange Act]." 15 U.S.C. § 78q(a)(1). One of the rules the SEC has promulgated pursuant to this statute is Rule 17a-8. As explained in the March Opinion, Rule 17a-8 is a valid exercise of the broad authority Congress conferred on the SEC in 15 U.S.C. § 78q(a)(1).
Alpine also makes a related argument that the FinCEN guidance on which the SEC relies was not meant to create rules of law, but rather provided a number of suggestions that broker-dealers could consider when filing SARs. Alpine also contends that it lacked notice about its SAR obligations because some guidance documents were issued after certain transactions occurred. Neither argument is persuasive.
First, while FinCEN guidance is informative and useful, its role in this action can be overstated. The violations that the SEC asserts occurred here arose from Alpine's failure to comply with Section 1023.320's mandates and the SAR Form's instructions, including the requirement that it provide in its SARs' narratives a "clear, complete and chronological description [of] what is unusual, irregular or suspicious about the transaction(s)." 2002 SAR Form at 3. These instructions have the force of law, having been issued as FinCEN regulations following a notice and comment period.
Second, it has long been established that an agency's guidance documents receive deference when they reasonably interpret an agency's ambiguous regulation.
Alpine also contends it is inappropriate to rely on some guidance documents cited by the SEC because those documents were promulgated after the SARs at issue were filed. The principal source of guidance cited here is the 2003 SAR Narrative Guidance. That document predates all of the SARs at issue. In addition, this Opinion cites several issues of the
Alpine makes two additional arguments about its interactions with FINRA and the SEC. Alpine first argues that it did not have notice of the SEC's theory of this case until it received the OCIE Report in 2015 and that it is accordingly unfair to hold it liable for failing to include mention of red flags in its SARs' narratives that the SEC asserts it improperly omitted. This argument fails. The SEC has the burden to show that Alpine's failures violated Section 1023.320. The standards at issue here are those that have existed since the issuance of the 2002 SAR Form, which provided the mechanism by which broker-dealers comply with the requirements of Section 1023.320. Nothing OCIE did or said in 2015 can increase the scope of that duty.
Alpine next contends that its level of compliance with Section 1023.320 increased over time, and that it has shown that it tried in good faith to comply with its SAR obligations. It is true that approximately two-thirds of the SARs at issue in the SEC's motion predate the FINRA Report. But even if Alpine is correct that its program improved over time, this does not immunize Alpine for its past failures to include required information in any SAR narrative, or to file a SAR when it was required to do so. A broker-dealer's duty to maintain an AML program reasonably calculated to ensure compliance with the BSA is distinct from the duty to file a complete report of suspicious transactions.
Finally, Alpine asserts that holding it liable under the SEC's theory in this case would be extraordinary and wreak havoc
As described below, the SEC has shown that the failures in Alpine's SAR-reporting regime were stark. Tellingly, Alpine does not contest in a large number of instances that it failed to include information in SAR narratives that the SAR Form itself directs a broker-dealer to include. Given the sheer number of lapses at issue in this case, there is no basis to conclude that a broker-dealer that reasonably attempts to follow the requirements of Section 1023.320 will be at risk. And questions about what effect this action will have on the SAR regime are ultimately about policy, not the law a court must apply. This Opinion resolves the SEC's motion by applying well-established principles of administrative law and summary judgment. Following those principles, the SEC's motion is granted in part.
Before addressing the various deficiencies in Alpine's compliance with the SAR reporting regimen that are asserted by the SEC, a threshold evidentiary issue must be resolved. Relying on Rule 1006, Fed. R. Evid., the SEC has supported its motion for summary judgment with ten tables that identify the SARs or transactions as to which it is asserting each alleged deficiency.
Fed. R. Evid. 1006. Such a summary must be "based on foundation testimony connecting it with the underlying evidence summarized and must be based upon and fairly represent competent [and admissible] evidence."
The SEC's ten tables include seven that correspond to the seven alleged deficiencies in the SAR narratives.
Each of these seven tables has six columns. The columns list the SAR item number,
Table 10 is itself a summary table for Tables 1 though 7. It lists all 1,594 SARs for which the SEC contends the SAR narratives were deficient. Table 10 contains columns identifying the SAR number,
The two remaining tables are Tables 11 and 12. Table 11 lists sales-and-liquidation patterns. The SEC contends that Alpine had a duty to file SARs reflecting these sales, but did not do so. Table 11 lists 1,242 groups of transactions, organized as follows. The right half of the table lists a deposit date, the volume of the deposit, the value of the deposit, the date a SAR was filed reporting the deposit, and the Bates stamp number for that SAR. The left portion of the table lists a group number, the customer name, a liquidation date, the number of shares sold, and the stock symbol. The SEC contends that Alpine should have filed a SAR for at least each of the 1,242 groups.
Table 12 lists the SARs that the SEC alleges were filed late. It lists the SAR number, the Bates stamp number, the date of the transaction reported, the date the SAR was filed, the number of days between the transaction and SAR, and the number of days the SAR was late. The number of days late is calculated by subtracting 30 from the number of days between date of the transaction and the date the SAR was filed.
These tables summarize voluminous evidence that is not subject to convenient examination in court. This evidence is organized by subject matter. Each type of violation alleged in the case has its own separate table, and one table also allows the fact-finder to determine whether a single SAR is alleged to reflect multiple violations. The SEC seeks summary judgment as to approximately 1,800 SARs, and moves for summary judgment as to approximately 3,500 other transactions that are listed in Alpine's transaction records. Accordingly, the threshold for Rule 1006 — that a summary be used to prove the content of voluminous writings — is met. Alpine does not suggest that it has not had access to the underlying documentation — which came from its files — or that the SARs and the SAR support files referenced
To the extent that the tables list information such as an item number, date of SAR filing, Bates stamp number, volume of shares in the underlying transaction, and the value stated in a SAR, these are classic examples of information that is appropriately captured in a summary table. The SEC has merely taken a number or date from a voluminous quantity of admissible documents and placed the data in a convenient format for the fact finder. On this basis, there can be little debate that these components of Tables 1 through 7 and 10 through 12 are admissible.
To the extent that a column in a Table identifies a particular alleged deficiency in a SAR and lists a Bates stamp page number from the SAR's support file upon which the SEC relies to show that deficiency, those columns also summarize the contents of voluminous files and are admissible to prove the contents of those files. Alpine is free to argue that there are inaccuracies in the tables — in fact, it has raised a few such arguments as to each of the tables. Subject to specific challenges by Alpine, therefore, these tables are admissible as summaries of the contents of voluminous admissible documents — the Alpine SARs and their support files, and Alpine transaction records.
Alpine argues that a column heading identifying the particular deficiency at issue for a SAR is an expert opinion. It is not. That column heading reflects the SEC's contention and includes as well a citation to the documents supporting that contention. This citation permitted Alpine, and permits the fact finder, to assess whether that contention is proven in the case of an individual SAR. Indeed, expert testimony would be inadmissible to prove these violations. An expert's opinion may not "usurp either the role of the trial judge in instructing the jury as to the applicable law or the role of the jury in applying that law to the facts before it."
Alpine also argues that Table 11 is inadmissible because the groups listed in Table 11 reflect expert conclusions unsupported by a reliable methodology. Not so. The group numbers are used by the SEC as a contention that each of the deposits and liquidations listed in a group form a suspicious pattern that had to be reported in a SAR. This is a question of fact to be resolved under the governing law. The SEC may have relied on an expert and consulting group to assist it in assembling the groups of transactions on which the SEC would focus in this action, but that task could have been done as well by an SEC attorney or an SEC paralegal. It reflects no more than the SEC's contentions. The fact finder, applying the controlling law, will have to examine the facts summarized in Table 11 and determine for each group whether there is an actionable pattern of suspicious trading that triggered Alpine's duty to file a SAR reporting the sales listed within a group. An expert cannot tread on that duty, which rests on the shoulders of a fact finder. Of course, a qualified expert could properly provide testimony generally about illicit and manipulative market activities and practices to inform a fact finder's examination of
Finally, Alpine contends that the SEC has failed to carry its burden of proof by relying exclusively on the tables without also offering each of the SARs and support files to which the tables refer. That objection is not well founded. In connection with the partial summary judgment motion, the SEC submitted exemplar SARs and support files; Alpine chose not to do so. The legal framework for the litigation of the SEC's claims having been described in the March Opinion, the SEC appropriately relied on Rule 1006 to present in convenient and summary form the voluminous evidence on which it relies. Alpine has had a full opportunity to raise questions of fact in response and to submit SARs and support files where it takes issue with the SEC's assertions. This Opinion examines that evidence, and where appropriate, denies the SEC's summary judgment motion.
The first of the four categories of claims brought by the SEC concerns 1,593 SARs that Alpine filed.
The issue of whether Alpine was in fact required by law to file the 1,593 SARs it did file became significant during the parties' briefing of the preliminary summary judgment motion.
The SEC contends that, in the circumstances at issue here, Alpine had a duty to file a SAR where the underlying transaction involved a large deposit of LPS, and the transaction also involved either one of six red flags it has identified or the transaction was conducted by a certain customer. Each of the 1,593 SARs reported customer deposits of LPS worth at least $5,000. Many reported far larger deposits.
Of the 1,593 SARs, the SEC contends that one or more of its identified red flags appears in the Alpine support files for 1,302 of those transactions, but is not mentioned in the SAR narrative. For the remaining SARs, the SEC relies on an alleged pattern of suspicious trading, specifically, that Alpine filed a large number of SARs for the same customer.
As described earlier in this Opinion, it is uncontested that the market for LPS is vulnerable to securities fraud and market manipulation schemes. These schemes depend on the deposit of a large amount of securities with a broker-dealer so that those securities can enter the market. Alpine does not take issue with either of these propositions.
Moreover, it is not unreasonable to infer from Alpine's very act of filing a SAR that the reported transaction had sufficient indicia of suspiciousness to mandate the creation and filing of a SAR. None of these SARs suggests that the filing was simply a voluntary act or otherwise filed outside of Alpine's attempt to comply with its duties under the law.
In addition, with one exception,
Alpine makes two arguments in opposition to the SEC's assertion that it was required to file these SARs. First, Alpine argues that there is no liability under the law for a broker-dealer's failure to file a SAR, only for failing to establish an adequate AML regime. Not so. While a deficient AML program may create liability, the failure to timely file a complete SAR may also create liability. This case involves the latter type of violation. As Section 1023.320(a)(1) states, in mandatory terms, a broker-dealer "shall file" a SAR "relevant to a possible violation of law or regulation." Alpine's position was also expressly rejected in 2002 by the Treasury Department when it promulgated Section 1023.320. The Treasury Department stated that "[a] regulator's review of the adequacy of a broker-dealer's anti-money laundering compliance program is not a substitute for, although it could be relevant to, an inquiry into the failure of a broker-dealer to report a particular suspicious transaction." FinCEN Section 1023.320 Notice, 67 Fed. Reg. at 44,053.
Alpine argues as well that the "sizeable LPS transaction-plus red flag" test proposed by the SEC for deposits of LPS fails to establish the reasonable suspicion that exists in criminal law pursuant to the Fourth Amendment.
Alpine does not explain why a Fourth Amendment concept should apply to the SAR reporting framework. Applying the standard used to determine the legality of a temporary, warrantless investigative detention of a person — particularly as Alpine defines the standard
By design, the SAR regime does not depend on or require a broker-dealer to make any finding of wrongdoing before it files a SAR. Section 1023.320 makes this clear: filing is required whenever a broker-dealer "has reason to suspect" that the transaction involves criminal activity. When FinCEN promulgated Section 1023.320, it considered and rejected the view that it would be "overly burdensome to require a broker-dealer to report transactions that could not definitively be linked to wrongdoing." FinCEN Section 1023.320 Notice, 67 Fed. Reg. at 44,051. Congress, when it enacted the legislation that authorized Section 1023.320, "sought to increase the reporting of transactions that potentially involved money laundering." March Opinion, 308 F.Supp.3d at 791 (emphasis supplied) (citing the Patriot Act, sec. 302, 115 Stat. at 296-97). Section 1023.320, accordingly, "target[s] all possible types of illegal activity."
As significantly, while Part II of the SAR Form provides boxes to check to identify the "Type of suspicious activity," these are broad categories such as "Market manipulation" or simply "Securities fraud." 2002 SAR Form at 1. The Form instructions also permit a filer to check "[m]ore than one box" and to check a box entitled "Other" with an explanation in the narrative. 2002 SAR Form at 1-2. The Form cannot be read to impose on the filer the duty to select "a definable criminal activity" when filing the SAR, or relieve a broker-dealer of the duty to file unless it can define the criminal activity in which the subject may be engaged.
Similarly, Alpine's argument that a broker-dealer may not consider the litigation history of its customer or the issuer, or their affiliates, is flatly contradicted by the SAR Form, which requires disclosure of "related litigation."
As noted, the SEC contends that the SAR narratives in 1,593 SARs were legally deficient because they omitted information from the Alpine support files for the SARs that the law requires to be included in the narratives. The SEC also contends that, with respect to these six red flags, their existence is another reason that a broker-dealer would have had reason to suspect that the transaction involved use of the broker-dealer to facilitate criminal activity, which triggered its duty to file a SAR.
In each instance, the SEC's identified red flags have been derived from the SAR Form and its instructions, as well as FinCEN and other guidance interpreting Section 1023.320. They take into account the unique characteristics of the LPS markets such as the difficulty in obtaining objective information about issuers, the risk of
Alpine argues that, although it was required to scrutinize these red flags, it had to do so in the context of all of the facts and circumstances surrounding the transaction and consider as well information that Alpine refers to as "green flags." Even if Alpine was required to file a SAR, Alpine's view is that the red flag that triggered a duty to investigate and report did not necessarily need to be disclosed in the SAR's narrative.
There are several problems with this approach. First, with the very limited exceptions described below, Alpine has not pointed to any evidence that it omitted reference to a red flag in any particular SAR's narrative because its examination of other information in that SAR's support file led it to conclude that the red flag was, after all, not indicative of suspicious trading activity. Second, Alpine's omission of a red flag from the discussion in the narrative is also at odds with FinCEN's view, as expressed on the SAR Form itself, that a SAR filer should provide in the narrative a "clear, complete and chronological description... of the activity, including what is unusual, irregular or suspicious about the transaction(s)." 2002 SAR Form at 3. The SAR Form adds that a filer should "[i]ndicate whether any information has been excluded from this report; if so, state reasons."
The SEC contends that 675 SARs omit a description of "related" litigation from the SARs' narratives. The 2002 SAR Form directs a filer to "indicate whether there is any related litigation, and if so, specify the name of the litigation and the court where the action is pending" in the narrative portion of a SAR. 2002 SAR Form at 3. Materially similar instructions are included in the 2012 SAR Instructions.
Webster's dictionary defines "related" as "having relationship" or "connected by reason of an established or discoverable relation." The relevant definition of relation is "an aspect or quality ... that can be predicated only of two or more things taken together," or a "connection." The SEC is thus entitled to summary judgment to the extent it shows that there is no question of fact as to the (1) presence of information about the litigation in the SAR support file, and (2) a connection between the litigation and the reported transaction. That connection is established where the litigation at issue concerns either the issuer of the securities in the transaction or the customer engaged in the transaction.
In connection with the partial summary judgment motion, the SEC proved that three SARs were deficient as a matter of law because Alpine failed to include information in the SAR narrative about related litigation. The omitted information, which was present in Alpine's support files for the SARs, indicated that the SEC had sued one customer and its CEO for fraud in connection with asset valuations and improper allocations of expenses, that another customer had pleaded guilty to conspiracy related to counterfeiting, and that
In Table 2, the SEC identifies the pages from the Alpine support files that describe the related litigation which the SEC contends should have been disclosed in the SAR, but was not. Alpine does not contend that the pages listed in the table do not include descriptions of litigation or that the SARs actually did include the information. It does argue for most of the 675 SARs, however, that it had no duty to include the missing information in the SAR narratives for one or more of the following reasons.
First, Alpine appears to argue that civil litigation with a private party is never "related" litigation, and need never be disclosed. To the extent it is relying on the March Opinion for that proposition, that reliance is mistaken.
Alpine next contends that summary judgment cannot be granted to the SEC because Alpine was diligent about obtaining information about its customers and others. According to testimony given by the AML Officer who began to work at Alpine in 2012, Alpine only disclosed litigation in its SARs where Alpine concluded that it was "actually ... relevant to the activity" reported in the SAR. In doing so, Alpine considered "the proximity" of "the infraction" to the transaction being reported.
As explained above, a broker-dealer must have a reasonably effective AML compliance program and also file SARs on all suspicious transactions. This action involves the latter duty, and Alpine's efforts in 2012 and beyond to improve its AML compliance program cannot save it from liability under Section 1023.320 and Rule 17a-8 where it did not file required SARs. And, as previously explained, when proving a violation of Rule 17a-8, the SEC has no burden to prove that a broker-dealer acted with scienter. Section 1023.320 imposes an objective test: A SAR must be filed when the broker-dealer has "reason to suspect" that the transaction requires a filing. 31 C.F.R. § 1023.320(a)(2). Finally, Alpine has provided no testimony regarding its analysis and decision-making process that led it to omit from any individual SAR the information about related litigation that appears in any particular SAR's support file. Nor has it pointed to any recorded analysis in a support file that reflects the decision that the information about the litigation need not be included. Its conclusory assertions would not raise a question of fact even if its subjective intent were relevant.
Finally, Alpine complains that the SEC has not described separately for each of these 675 SARs why the omitted information needed to be disclosed. But, that exercise was conducted in connection with the briefing of the partial summary judgment motion so that the parties would have an early understanding of the legal standards that would be applied to the SEC claims regarding the many SARs at issue in this lawsuit. To the extent that Alpine has raised a question of fact now as to whether the omitted information identified by the SEC in Table 2 for any particular SAR was in fact "related" litigation or did not for some other reason need to be disclosed, then those assertions are addressed next.
Alpine contends that the SEC's motion should be denied as to 499 SARs that Alpine filed for transactions conducted by Customers A, D, and E. The assertions will be addressed in order of the customers for which Alpine filed the largest number of SARs.
Customer E is a capital management firm and 372 SARs in Table 2 relate to Customer E alone. The Alpine support files indicate that on October 25, 2010 the SEC sued Customer E, its former manager, and its CEO for (a) overvaluing Customer E's largest holdings, (b) making material misrepresentations to investors, and (c) misusing investor funds.
This is related litigation. The SEC has shown it is entitled to summary judgment with respect to its claim that Alpine was required to file SARs for every large deposit of LPS made by Customer E and that the Customer E SARs Alpine did file were deficient if they failed to disclose the ongoing SEC litigation against Customer E for securities law violations.
Alpine contends, however, that it was entitled to omit mention of the SEC lawsuit from its SARs because Alpine's office files included a request by its affiliated introducing broker, SCA, that Alpine make an exception to its float limit policy despite the ongoing litigation that the SEC had filed against Customer E.
The next customer at issue is Customer A. Alpine argues that SEC litigation against an affiliate of Customer A did not need to be disclosed. While Alpine makes arguments as to each of the ninety-three SARs Alpine filed for Customer A that are listed in Table 2, its argument ultimately has significance for only eight of the SARs.
Alpine does not contend that the SEC action against the affiliate was not "related" litigation. Instead, it relies again on a memorandum sent to it by its affiliated introducing broker, SCA, which requested an exception to Alpine's float limit policy in connection with Customer A, to excuse the nondisclosure. The memorandum argued that the issues concerning Rule 504 are "subtle" and that Customer A itself no longer invested in such transactions. This memorandum, which was not in the support files for the SARs but in Alpine's office files, is not sufficient to create a question of material fact as to whether the SEC action against Customer A's affiliate, which was also controlled by Customer A's own president, was related to the transaction being reported and had to be disclosed. Summary judgment is accordingly granted as to Customer A's SARs listed in Table 2.
The third customer for which Alpine attempts to raise a question of fact is Customer D, as to whom Alpine filed thirty-four SARs included in Table 2. Alpine's SAR support files included information that Customer D's president and others had engaged in a mortgage fraud scheme in 2010. Alpine has submitted a 2011 press report which describes the scheme as follows: Customer D's president convinced unsophisticated buyers to purchase property at inflated prices, falsified loan documents, and fraudulently secured loans that all ended in default, costing the government millions of dollars. The president of Customer D owned the entity engaged in the mortgage fraud scheme, and along with his co-defendants was required to pay damages and penalties to the government.
Alpine contends that there are questions of fact as to whether it had to include information about the settlement in the SARs because Customer D's president had committed the fraud in connection with another entity that he owned, and the settlement had been reached in 2011, while the SARs were filed between three and four years later.
Finally, Alpine argues that it had no duty to include certain litigation information in the narrative section of ten of the SARs listed on Table 2. These are SARs 515, 612, 701, 703, 748, 859, 904, 1222, 1970, and 1971.
Table 2 identifies the omission from SAR 701 as the failure to include information about third-party litigation. The support files for SAR 701 reveal that a director of the issuer had been sued for securities fraud. Alpine argues that it has no duty to disclose this information because the litigation is neither a regulatory nor criminal action. As noted above, it is wrong. Nothing in the 2002 SAR Form or the 2012 SAR Instructions limits the disclosure of related litigation to regulatory actions filed by the SEC or criminal actions filed by a prosecutor's office. So long as there is a connection between the litigation and the reported transaction, there is a duty to disclose the litigation. No reasonable jury could find that a pending lawsuit for securities fraud against an issuer's director was not connected to the deposit of a large quantity of that issuer's LPS.
The support files for SARs 1970 and 1971 each state that Alpine's customer is the subject of an ongoing SEC Action, and that the CEO and CFO of the issuer have been "listed in civil suit alleging securities fraud for misrepresentation." The narrative for SAR 1970 reports the SEC action against the customer but omits mention of the civil suit against the CEO and the CFO of the issuer. The narrative for SAR 1971 reports an SEC "investigation" of the customer and again omits mention of the securities fraud action against the CEO and CFO of the issuer. The securities fraud action against two officers of the issuer was litigation related to the large deposit of the issuer's LPS, and as a matter of law Alpine had a duty to disclose it in these SARs' narratives.
Table 2 identifies the omission from SARs 515 and 703 as the failure to identify an ongoing SEC action for accounting violations against an officer of the issuer who is identified in Table 2 as a person with the middle initial W.
Table 2 indicates that SAR 859 did not disclose information about a broker. According to SAR 859's support file, an "unrelated" broker was "in litigation for investing client's money" in the issuer without disclosing risks associated with LPS. Without more information about how the litigation relates to the transaction reported in the SAR, summary judgment is denied.
Lastly, Table 2 indicates that SARs 904 and 1222, which reported transactions that occurred in 2011 and 2012, omitted information from their support files regarding the CEO of the issuer — the same individual in both SARs. That CEO had disgorged almost $75,000 in settlement of a 1994 SEC action for violating Section 57(a)(1) of the Investment Company Act of 1940 through sales than occurred in 1988.
The SEC is entitled to summary judgment as to 668 SARs in Table A-2. As to those SARs, the SEC has shown both that Alpine was required to file those SARs, and that the filed SARs were deficient due to the omission of information contained in the Alpine support files that is identified in Table 2. Alpine has identified a question of material fact as to the following seven SARs, as to which the SEC's motion is denied: SARs 515, 612, 703, 748, 859, 904, and 1222.
The SEC claims that 241 SARs listed in Table 3 were deficient for failing to disclose derogatory information regarding the history of a stock, including that the issuer was a shell company or formerly a shell company. Other types of derogatory information include such things as the issuer's frequent name changes and trading suspensions.
The SAR Form requires a filer to provide "a clear, complete and chronological description" of the suspicious activity, "including what is unusual, irregular or suspicious about the transaction(s)." 2002 SAR Form at 3. FinCEN has identified the "inability to obtain ... information necessary to identify originators or beneficiaries of wire transfers" as an example of suspicious activity that should be disclosed in a SAR. FinCEN Shell Company Guidance at 3-5. FinCEN guidance also explains that a company being a "suspected shell entit[y]" is one of several "common patterns of suspicious activity." SAR Narrative Guidance at 5. Although "most shell companies are formed by individuals and businesses for legitimate purposes," FinCEN counsels that "a SAR narrative should use the term `shell' as appropriate." FinCEN Shell Company Guidance at 5. For these reasons,
In its preliminary motion for summary judgment, the SEC identified three SARs as exemplars of this type of deficiency. One SAR omitted that the issuer of the deposited stock was a shell company. Another omitted that the issuer had been a shell company within the last year.
In opposition to this portion of the SEC's motion, Alpine has submitted its own table, which lists information in the support file for SARs which, Alpine contends, rebuts the SEC's claim that it had a duty to include the omitted derogatory information identified by the SEC in Table 3. Alpine's table and its arguments in opposition to this portion of the SEC's motion fall into three broad categories.
Alpine first contends that the March Opinion did not hold that Alpine had a duty to disclose in its SARs that the issuer, as opposed to the customer, was a shell. Alpine is wrong. Indeed, in each of the three instances described in the March Opinion, Alpine's SARs were deficient because Alpine failed to disclose derogatory information about the issuer.
Alpine next argues that the SEC has failed to carry its burden of showing that Alpine must always disclose that an issuer was once a shell corporation.
The third and final category of omitted negative information concerning issuers that Alpine contests includes frequent name changes by an issuer, trading being suspended on an issuer's security, the issuer having a "caveat emptor" designation, the issuer having sold unregistered shares, and the issuer having been delisted. Table 3 apparently includes 113 SARs in which derogatory information of this kind was omitted. These types of derogatory information may indicate that the issuer is engaging in unlawful distributions of securities or is attempting to evade requirements of the securities laws. Neither Alpine nor its expert suggest otherwise.
Instead of disputing the significance of this derogatory information, Alpine opposes summary judgment on these 113 SARs by arguing that the support files included information showing that the issuers were "current" in their SEC filings of Forms 10-K and 10-Q and had freely tradable securities under SEC Rule 144.
The SEC claims that the narratives in the fifty-five SARs listed in Table 4 were deficient for failing to include information that there was a history of stock promotion in connection with the LPS being deposited with Alpine. The unreported stock promotion activity occurred between one week and eighteen months before the SAR was filed. The fifty-five SARs reported deposits ranging from 500,000 to 800 million shares of LPS. The SEC has shown that Alpine was required to file those SARs that reported a substantial deposit of LPS where the stock promotion occurred within six months of the deposit and to include information about the stock promotion activity in the SAR narrative. Summary judgment is therefore granted on forty-one of the fifty-five SARs.
The SAR Form's instructions explain that the SAR narrative must "[p]rovide a clear, complete and chronological description... of the activity, including what is unusual, irregular or suspicious about the transaction(s)." 2002 SAR Form at 3. According to FinCEN, a common scenario of suspicious trading activity is a substantial deposit of a low-priced and thinly traded security, followed by the systematic sale of that LPS shortly after the deposit.
In its preliminary summary judgment motion, the SEC identified three Alpine SARs that described sizable deposits of LPS, but included only a barebones narrative in the SARs. The SARs failed to disclose information regarding stock promotion contained in the Alpine SAR support files that had occurred between two weeks to two months before the reported transaction, including information found in Google search results, screenshots of websites, and news articles. March Opinion, 308 F.Supp.3d at 803. Alpine acknowledged in connection with that motion practice that evidence of stock promotion activity is relevant if connected to a pump-and-dump scheme.
In opposition to this current motion, Alpine does not dispute that it had a duty to include in its SAR narratives information in its possession about stock promotion activities when it was reporting a sizeable deposit of a LPS. It argues, however, that it was only required to disclose stock promotion activities when the stock promotion was "ongoing."
Neither the SEC nor Alpine has directly addressed when a history of stock promotion is stale for SAR reporting purposes. The one month cut-off which Alpine proposes in opposition to this motion is clearly too short a period. Pump-and-dump schemes can last months or even years, and promotion campaigns can occur in several cycles over that period.
In light of the legal authority cited above, the SEC will be granted summary judgment for those SARs, which account for roughly forty-one of the fifty-five, in which the SAR support files had evidence of stock promotion activity occurring within six months of the large-scale deposit of the LPS with Alpine. While a fact finder must determine the outer limit, stock promotion activity that occurs within six months of these deposits constituted, as a matter of law, a red flag requiring disclosure in the SAR.
Despite arguing that it had no duty to report stock promotion activity unless it had occurred within one month of the deposit reported in its SARs, Alpine did not disclose that near contemporaneous activity in over a dozen of its SARs.
As discussed above, a broker-dealer has a duty to file a SAR when it has reason to suspect that the transaction may involve use of the broker-dealer to violate the law, and to include in the SAR a "clear" and "complete" description of activity that is "unusual, irregular, or suspicious" about the transaction.
The SEC claims that thirty-six SARs listed in Table 5 were deficient for failing to disclose in their narratives the problems with the issuers described in the Alpine support files for the SARs, even though millions of shares of that issuer's LPS were deposited with Alpine.
The SAR Form requires filers to provide a "clear" and "complete" description of what is "unusual, irregular or suspicious about the transaction(s)." 2002 SAR Form at 3. FinCEN has explained that suspicious activity "common[ly]" includes transactions involving "parties and businesses that do not meet the standards of routinely initiated due diligence and anti-money
The SEC's preliminary motion for summary judgment identified three SARs in which Alpine reported deposits of millions of shares of LPS. The SARs failed to disclose that Alpine was either unable to locate a company website for the issuer or that the issuer's corporate registration was in default. The March Opinion concluded that a SAR reporting a deposit of an enormous quantity of LPS without also disclosing such problems with the issuer was deficient as a matter of law. 308 F.Supp.3d at 804.
Alpine contends that it only needed to report that the issuer's website was not functioning, that its business registration was in default, or that it had no current SEC filings if Alpine could not confirm that the issuer was an "active and functioning" entity. Alpine asserts that it was able to confirm that each of the issuers for these SARs was an "active" company based on an examination of the issuer's SEC filings, documentation that its stock was "free trading" for the purposes of SEC Rule 144, or indications that the issuer was not a shell company.
Each SAR must, of course, be examined individually. When that is done, Alpine's defense evaporates. But, there is a larger point that is relevant here. If a SAR must be filed for a transaction, then the information casting doubt on the legitimacy of the issuer must be included in the SAR. And that is so even when other information also exists that suggests the issuer may be a functioning business. The duty of the filer is not to weigh and balance the competing inferences to be drawn from the negative and the more reassuring pieces of information, but to disclose "as much information as is known to" the filer about the subjects of the filing.
The SEC has carried its burden of showing that Alpine had a duty to file each of these thirty-six SARs. Each of these SARs reflects the deposit of between 110,000 and 164 million shares of LPS,
In filing the required SARs, Alpine had a duty to disclose that the issuer's business license was expired, its website was non-functioning, or there were irregularities in its SEC filings. Such information is part of the "Five Essential Elements" of a transaction. The fact that the issuer's shares may be tradable under a different SEC regulation does not change the scope of the SAR reporting obligation.
The SEC claims that 700 SARs
The SAR Form requires a filer to "[d]escribe conduct that raised suspicion," and to do so with a "clear, complete and chronological" description of the suspicious activity. 2002 SAR Form at 3. One type of transaction that may be suspicious is a "[s]ubstantial deposit, transfer or journal of very low-priced and thinly traded securities."
In response to the instant motion, Alpine first argues that low trading volume is not a red flag because it is a "hallmark of microcap stocks." That argument misses the point. Low trading volume need not be disclosed in a vacuum. But, if there is a deposit of LPS that is substantial in comparison with the average volume of trading in that LPS, then there is a duty to report both the size of the deposit and the relatively thin trading volume.
Alpine next questions why comparatively thin trading volume must be reported when the differential between the volume of shares in a transaction and the average trading volume is only 300%, as opposed to some other figure. The SEC has not provided expert testimony or any other basis to conclude that a ratio of three is the appropriate demarcation for reporting the transaction and the trading volume in LPS. The SEC relied on three exemplars in connection with the preliminary summary judgment motion, and their ratios were fifty, 100 and 600.
Finally, Alpine argues that it had no obligation to add information about trading volumes to its SARs because such information is already available to law enforcement. This argument is meritless. Other categories of information, such as related litigation, are publicly available but must be included in the SAR. The purpose of a SAR is to provide law enforcement with timely and "complete" access to information that permits them to understand what is suspicious about the reported activity. 2002 SAR Form at 3. Nothing in the SAR reporting regime provides the exception which Alpine suggests for information available to the government through other means.
The SEC moves for summary judgment as to 289 SARs where a foreign entity or individual was involved in the transaction reported by Alpine in its SAR, but Alpine did not disclose that foreign involvement in the SAR narrative. For the following reasons, the SEC is granted summary judgment as to these 289 SARs.
The 2002 SAR Form directs filers to "[i]ndicate" in the SAR narrative "whether U.S. or foreign currency and/or U.S. or foreign negotiable instrument(s) were involved. If foreign, provide the amount, name of currency, and country of origin," and to include in the narrative "foreign bank(s) account number(s)," and "passport(s), visa(s), and/or identification card(s)" belonging to an involved "foreign national." 2002 SAR Form at 3. The 2012 SAR Instructions direct filers to include essentially the same information in the SAR narrative.
SAR Narrative Guidance at 4.
In its preliminary motion for summary judgment, the SEC submitted three SARs in which Alpine reported enormous deposits of LPS. One SAR listed a foreign address for the customer but omitted from the SAR narrative information about foreign correspondent accounts that were involved in the underlying transaction. Another SAR provided a foreign address for the customer in the subject information boxes of the SAR, but omitted in the narrative any reference to the foreign nature of the transaction, much less that the country in question has been identified as a jurisdiction of primary concern for money laundering activity. The last SAR did not disclose any foreign involvement with the transaction, omitting that the deposited shares were purchased by the customer through a transfer of funds to a foreign bank account. The March Opinion held that, regardless of whether a SAR filer has disclosed a foreign entity in other parts of the SAR, "a broker-dealer is required by law to include information constituting the Five Essential Elements and foreign connections to the transaction in the narrative section of any SAR that the filer is required to file." 308 F.Supp.3d at 806.
Alpine first argues that it need only include information in the SAR narrative about foreign involvement in the transaction where the foreign jurisdiction is a "high-risk" jurisdiction. This argument may be swiftly rejected. Neither the SAR Form instructions nor FinCEN guidance creates a distinction between high-risk and other foreign jurisdictions.
Alpine next argues that its inclusion of foreign addresses in other parts of the SAR form obviated the need to disclose a foreign connection to the transaction in the SAR narrative. Not so.
Finally, Alpine argues that in three of the 289 SARs it adequately disclosed the foreign connection to the transaction in the SAR narratives because it disclosed that its customer had acquired the shares from a resident of Belize. In none of these SARs did Alpine indicate in the narrative, however, that Alpine's customer was itself a foreign entity. The narratives are accordingly deficient, and the SEC is entitled to summary judgment as to these three SARs as well.
Finally, the SEC seeks summary judgment as to approximately 295 SARs listed on Table 1 filed by Alpine in connection with large deposits of LPS made by three customers.
Each of these SARs reported a large deposit of a LPS. In addition, each relates to a deposit by one of three Alpine customers: Customers A, C and E. As described above, Customers A and E had significant "related" litigation. For Customer A, there was a settled SEC action with an affiliate of Customer A, whose president was also the president of Customer A. For Customer E, there was an ongoing SEC action against Customer E, its CEO, and its former manager.
The SEC has carried its burden of showing that a reasonable broker-dealer would have had reason to suspect that substantial deposits of LPS by Customers A and E involved use of the broker-dealer
The SEC further contends that the twenty-two SARs filed for large LPS deposits by Customer C were required filings.
In arguing that Alpine was required to file these SARs, the SEC does not appear to be relying on any evidence that either Customer C or the issuer of the LPS reported in the SAR was the subject of "related" litigation or derogatory information. Instead, it appears to rely on the fact that Customer C frequently conducted other transactions in which the issuers of the securities had had significant regulatory or criminal actions brought against them. The SEC has not explained why Customer C's transactions in LPS issued by questionable issuers would give a broker-dealer a reason to suspect that all of Customer C's LPS transactions involved questionable issuers. There is accordingly a question of fact as to whether Alpine was required to file SARs for Customer C where the only information missing from the narrative is the Five Essential Elements and the narrative does not include a statement that Alpine considered the transaction suspicious.
In its second category of claims, the SEC seeks summary judgment as to 3,568 sales of LPS listed in Table 11. In each instance, Alpine filed a SAR reflecting a large deposit of a LPS but did not file a SAR reflecting the sales that followed those deposits. The SEC contends that, when a SAR is filed on a large deposit of LPS, a broker-dealer is obligated to file new or continuing SARs when the shares are sold within a short period of time. In Table 11, the SEC has identified 1,242 deposit-and-liquidation groups, which together include 3,568 individual sales of shares, each sale being worth $5,000 or more. For the following reasons, the SEC's motion is granted as to 1,218 groups where Alpine failed to file a SAR reporting a customer's sales after the customer had made a substantial deposit of LPS in a thinly traded market.
Section 1023.320 requires reporting of a suspicious transaction "if the transaction or
In its preliminary summary judgment motion, the SEC provided evidence that one customer deposited over twelve million shares of a LPS in February 2012, and then sold in twelve transactions ten million shares in February and March of 2012. That pattern repeated itself in April through August 2012, with the customer depositing a very large number of shares in the same LPS and within weeks selling a large proportion of those shares in a series of smaller transactions. Alpine had timely filed SARs of the deposits, but not for the sales. The SEC also provided evidence that two other customers had each deposited a large number of physical certificates of a LPS, and then sold an almost equal amount of shares in that LPS in a series of small transactions over the weeks immediately following the deposits. The March Opinion granted summary judgment to the SEC, conditioned on it establishing that its charts of the trading activity were accurate.
Alpine first argues that not every liquidation following a deposit is suspicious, and therefore it was not required to file SARs for liquidations just because it filed a SAR to report the deposit. If the liquidations followed the deposit of a large number of shares of LPS, then the precedent recited above forecloses this argument. This pattern of transactions is a hallmark of market manipulation.
Alpine next argues that the filing of SARs for every such liquidation would flood regulators with thousands of additional SARs and be unworkable. But, as the SEC points out, multiple transactions may be reported in a single SAR. In fact, Alpine reported multiple transactions in some of the SARs it submitted in its opposition to this motion. Both the 2002 SAR Form and 2012 SAR Instructions allow filers to describe multiple transactions; they direct filers to describe suspicious activities and transactions.
Alpine next argues that its AML review of the deposits confirmed that the shares were freely tradable, and that was all that the law required. It explains that, since its business model treated each deposit as if the deposited LPS would be sold shortly thereafter, its careful review of the need to file a SAR for the deposit fulfilled all of its obligations under the law.
Alpine next contends that, if this portion of the SEC's motion is granted, that should result in a finding that Alpine violated its SAR reporting obligations at most 1,242 times, and not 3,568 times.
The duty that Alpine is alleged to have violated is the duty to file a SAR. Those missing SARs would have reported patterns of suspicious trading. The text of Section 1023.320 states that "[a] transaction requires reporting" if it is conducted through a broker-dealer and the broker dealer "has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part)" involves illegal activity. 31 C.F.R. § 1023.320(a)(2). The Section 1023.320 Notice explains FinCEN's view that
Section 1023.320 Notice, 67 Fed. Reg. at 44,051. Alpine therefore had a duty to file SARs that reported each sale that was part of a suspicious pattern.
Finally, Alpine objects to eleven groups identified in Table 11 on the ground that the sales occurred too long after the deposit to require Alpine to file a SAR.
Group 1221 begins with a deposit of 8-million
Group 1233 consists of one deposit of 1-million shares valued at $1-million in mid-November 2012. Alpine filed a SAR the next day. Nineteen days later, the customer began the selloff.
The SEC moves for summary judgment as to 251 SARs identified in Table 12 that were filed long after the transactions they reported, often more than six months later. Section 1023.320 directs that "a SAR shall be filed no later than 30 calendar days after the date of the initial detection by the reporting broker-dealer of facts that may constitute a basis for filing a SAR under this section." 31 C.F.R. § 1023.320(b)(3). Summary judgment is denied due to the SEC's failure to show that Alpine had an obligation to file these SARs.
To establish Alpine's duty to file each of these SARs, the SEC relies on the fact that Alpine filed the SARs to comply with an order from FINRA to do so. This is not sufficient to establish for purposes of this lawsuit that Alpine had an independent duty to file the SARs.
The final portion of the SEC's motion is directed to Alpine's failure to maintain support files for 496 of its SARs. The motion is granted.
A broker-dealer is required to maintain support files for its SARs. Section 1023.320(d) provides as follows:
31 C.F.R. § 1023.320(d) (emphasis supplied). Section 1023.320
March Opinion, 308 F.Supp.3d at 811-12 (citation omitted).
The SEC's evidence of Alpine's failure to maintain files rests on the efforts the SEC made in 2015 and 2016 to collect the Alpine support files for SARs under investigation. In 2016, Alpine produced some of the files that the SEC subpoenaed, but no support files for the 496 SARs that are the subject of this motion. The SEC provided Alpine with a list of SARs for which it could not locate any support files in the Alpine document productions. Alpine's counsel represented during a November 2016 telephone call that some support documents "simply don't exist." Despite additional requests during the discovery period for Alpine to supplement its document production and produce the missing files, Alpine has not produced the missing files.
In opposition to this motion, Alpine has not provided evidence that it ever provided the SEC with the support files for these 496 SARs. Instead, Alpine makes two meritless arguments. First, it seeks a Rule 56(d) deposition of the SEC affiant who has described the search through the Alpine document productions in a fruitless effort to locate the missing support files. If Alpine maintained the missing files, then all it needs to do to defeat this prong of the SEC's motion is to produce them now,
Second, Alpine argues that a failure to maintain files is not a violation of Rule 17a-8, which is the Rule upon which the SEC's action is predicated. Alpine argues that the SEC's recourse, if any, was to sue for a violation of 17 C.F.R. § 240.17a-4(j) ("Rule 17a-4").
The SEC's July 13, 2018 motion for summary judgment is granted in part. The SEC has shown as a matter of law that Alpine violated Rule 17a-8 repeatedly by filing required SARs with deficient narratives, failing to file SARs for groups of suspicious liquidation transactions, and failing to maintain and produce SAR support files.
FinCEN, Guidance on Preparing a Complete & Sufficient Suspicious Activity Report Narrative 27 (Nov. 2003), https://www.fincen.gov/sites/default/files/shared/sarnarrcompletguidfinal_112003.pdf ("SAR Narrative Guidance").
Moreover, more than a few of the 1,593 SARs state explicitly that Alpine thought the transaction was suspicious. For instance, the narrative portion of SAR 348 states that "Alpine is filing this SAR because of the potentially suspicious nature of depositing large volumes of shares involving a low-priced security(ies)."
17 C.F.R. § 240.17a-4(j).
