DENISE COTE, District Judge.
Plaintiff United States Securities and Exchange Commission ("SEC") seeks an injunction and imposition of $22,736,000 in civil penalties against defendant Alpine Securities Corporation ("Alpine") for Alpine's 2,720 violations of its obligation to file suspicious activity reports ("SARs"). Alpine opposes imposition of any injunction and contends that the civil penalties should not exceed $720,000. For the following reasons, an injunction will issue against Alpine and civil penalties are assessed in the amount of $12,000,000.
Much of the factual and regulatory background relevant to this motion is described in the two summary judgment Opinions issued in March and December 2018.
Alpine principally provides brokerage clearing services for penny stocks and microcap securities traded in the over-thecounter market.
Financial regulators like FINRA,
The Bank Secrecy Act ("BSA"), 31 U.S.C. § 5311,
As described in greater detail in the December Opinion, Section 1023.320 provides that "
In addition, Section 1023.320 requires a broker-dealer to retain a copy of any SAR filed and supporting documentation "for a period of five years from the date of filing the SAR."
SARs are currently submitted to FinCEN via an electronic SAR Form.
FinCEN has issued several guidance documents explaining the scope of the SAR reporting duty in the narrative section of the SAR Form. A summary of that guidance, including examples of relevant information identified by FinCEN, is provided in the December Opinion.
As the Treasury Department has explained, the SEC enforces SAR regulations pursuant to Section 17(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a,
Alpine is a clearing broker that primarily provides clearance and settlement services for microcap securities traded in the over-the-counter market. It was purchased by its current owner in early 2011. That owner also owns Alpine's affiliate Scottsdale Capital Advisors ("SCA"), the introducing broker for most of the transactions at Alpine that are at issue here. SCA settled a FINRA enforcement action in November 2011 that the SEC had brought for, among other things, SCA's own failure to file SARs and its omission of material information from the SARs it did file.
From March 2, 2011 through January 22, 2012, FINRA conducted a financial, operational, and sales practices examination of Alpine. On July 23, 2012, FINRA shared its highly critical findings with Alpine during an exit meeting. On September 28, 2012, FINRA issued its seven-page report of that examination ("FINRA Report"), documenting Alpine's widespread failures to comply with its obligations under the regulations that govern its industry.
The FINRA Report identified ten exceptions to Alpine's practices. It disclosed that Alpine failed to timely file
In addition, the FINRA Report determined that the narrative sections of the 823 SARs that Alpine filed during the examination period were "substantively inadequate" and in violation of Section 1023.320. The FINRA report emphasized that the narratives for Alpine's SARs "failed to fully describe why the activity was suspicious" and therefore "fail[ed] to justify at the basic core the legitimacy of the SAR filing." It criticized Alpine for submitting SARs in the form of two basic, boilerplate templates, "neither of which were substantively adequate as they failed to fully describe why the activity was suspicious."
As the December Opinion confirmed, Alpine's SAR narratives were woefully inadequate. Over half of the SARs on which the December Opinion granted summary judgment were deficient in several significant respects, failing to include multiple pieces of information that the SAR Form and its instructions require to be included.
During and after the FINRA examination, Alpine's ownership hired additional legal and compliance personnel and took some measures to improve its anti-money laundering ("AML") program. Beginning in the fall of 2012, for example, Alpine arranged for an annual audit of its AML program and created standard operating procedures for compliance with AML regulations.
Roughly two-thirds of the SARs that the SEC contends Alpine filed with deficient narrative sections were filed before September 28, 2012, the date on which Alpine received the FINRA Report. Alpine's faulty practices, however, continued well beyond that date. Roughly one-third of the SARs at issue in this action were filed after October 1, 2012, including in 2013, 2014, and 2015. The December Opinion granted summary judgment on hundreds of separate violations of Section 1023.320 that occurred in both 2013 and 2014, many of which were the failure to file a SAR when Alpine had the obligation to do so. The SEC identified comparatively few violations that occurred during the year 2015.
There is a snapshot of Alpine's practices as they existed about two years after the FINRA exit interview in July 2012. In July 2014, the SEC Office of Compliance Inspections and Examinations ("OCIE") conducted a one-week on-site review of Alpine's compliance practices. The OCIE Report reviewed 252 of the over 4,600 SARs filed by Alpine between January 2013 and July 2014. On April 9, 2015, OCIE issued a report ("OCIE Report") strongly critical of Alpine.
The OCIE Report found that 50% of the 252 SARs "failed to completely and accurately disclose key information of which [Alpine] was aware at the time of filing." It concluded that Alpine's SAR "narratives generally contained `boilerplate' language and very little — if any — specific and material information that Alpine identified in its investigations of the matters." 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; or that an issuer had been a shell company. According to the OCIE Report, Alpine's failure to disclose key information "rendered the SARs less valuable to investigators trying to understand the activity and any criminal or administrative implications thereof."
The OCIE report described Alpine's conduct as "
The SEC filed this action against Alpine on June 5, 2017. Its complaint alleged violations of Rule 17a-8 during a period of May 17, 2011 through December 31, 2015. As invited by the Court, the SEC moved for partial summary judgment based on exemplar SARs in each of four categories that it alleged revealed violations of Rule 17a-8.
Relying on the guidance given in the March Opinion regarding the legal standards that would be applied in this action, the SEC thereafter moved for summary judgment as to Alpine's liability for several thousand individual violations of Rule 17a-8. The SEC's motion focused on four categories of deficiencies in Alpine's compliance with SAR reporting requirements: (i) filing SARs with deficient narratives ("Deficient Narrative SARs"), (ii) failing to file SARs reflecting sales that followed large deposits of LPS ("Failure to Report Violations"), (iii) filing SARs long after the transactions were completed ("Late-Filed SARs"),
The findings in the December Opinion are highly relevant to this decision on penalties. While those findings are incorporated by reference and will not be repeated here, the granularity of the findings and the extent to which they reveal how widespread the deficiencies were in Alpine's SAR-filing system bear emphasis.
The December Opinion is significant as well for the determination of penalties because it is a decision rendered on a summary judgment motion. It reflects an extremely conservative finding regarding the extent of Alpine's disregard of its legal obligations. In identifying those circumstances in which there could be no factual dispute regarding Alpine's failure to abide by those legal obligations, the December Opinion relied on a narrow set of measurements. A few examples suffice. Although the SEC had argued that SARs were deficient for failing to include information that there was a history of stock promotion activity in connection with deposited LPS up to eighteen months before the SAR was filed, the December Opinion granted summary judgment only for those SARs that failed to report stock promotion activity that occurred within six months of a substantial deposit of LPS.
The December Opinion also revealed in other ways the risks to market integrity represented by Alpine's decision to ignore its regulatory obligations. For instance, in establishing that Alpine had a legal duty to file the SARs that the SEC asserted had been filed with a deficient narrative section, the SEC identified six red flags which triggered a broker-dealer's duty to file a SAR. These red flags were derived from the SAR Form and its instructions as well as FinCEN and other guidance interpreting Section 1023.320. The red flags "take into account the unique characteristics of the LPS markets such as the difficulty in obtaining objective information about issuers, the risk of abuse by undisclosed insiders, and the opportunity for market manipulation schemes."
The six red flags are: (1) the existence of any related litigation; (2) the issuer's status as a shell company or a history of derogatory information regarding the issuer; (3) a history of stock promotion in connection with the LPS being deposited; (4) the existence of an unverified issuer, e.g., an issuer with an expired business license or nonfunctioning website; (5) a comparatively low average daily trading volume compared to the amount of stock being deposited in a single transaction; and (6) involvement in the transaction by a foreign entity or individual.
The March and December Opinions also illuminate the extent to which Alpine has continued right up until today to deny that it had a deficient SAR-filing regime. For example, it took the extreme position in this litigation that its filing of a SAR could not be taken as an admission that it had any duty to file a SAR in connection with the transaction. It argued that the SEC had to independently show that Alpine had such a duty to file a SAR for each transaction because Alpine's filings were simply "voluntary" filings as opposed to filings made pursuant to the law's mandates to alert regulators to suspicious trading activity. March Opinion, 308 F. Supp. 3d at 799 & n.20.
One more example is useful to illustrate Alpine's continued resistance to its legal obligations. In opposition to summary judgment Alpine argued that, even if it was required to file a SAR, it did not have to disclose the existence of a red flag in the SAR's narrative section. This argument was rejected for several reasons. December Opinion, 354 F. Supp. 3d at 426. Among those reasons was the substance of the SARs themselves. Nearly all of Alpine's SARs used "template narratives that failed to include any details, positive or negative, about the transactions."
After the December Opinion was issued, a conference on April 12 and an Order of April 30, 2019 resolved all remaining disputes on that Opinion's findings. As the parties now agree, the December Opinion granted summary judgment as to 2,720 violations comprising 1,010 Deficient Narrative SARs, 1,214 Failure to Report Violations, and 496 Support Files Violations.
The SEC has decided to forgo trial on the remainder of the alleged violations of Rule 17a-8. Its motion for remedies was filed on May 3 and became fully submitted on July 11.
"Once the district court has found federal securities law violations, it has broad equitable power to fashion appropriate remedies."
Section 21(d)(3) of the Exchange Act authorizes an award of civil penalties "for both deterrent and punitive purposes."
As modified by the Debt Collection Improvement Act of 1996 and corresponding SEC regulations, the maximum amounts specified for non-natural persons are as follows. For each violation occurring between March 4, 2009 and March 5, 2013, the maximum amount specified is $75,000 at tier one, $375,000 at tier two, and $725,000 at tier three. 15 U.S.C. § 78u(d)(3)(B); Exchange Act Release No. 34-59449, Feb. 25, 2009 (effective Mar. 3, 2009); 17 C.F.R. § 201.1001; Table I to 17 C.F.R. § 201.1001.
Beyond these restrictions, the amount of the penalty is within "the discretion of the district court,"
The SEC seeks civil penalties in the amount of $10,000 for each Deficient Narrative SAR and Failure to Report Violation. It seeks a penalty of $1,000 for each Support File Violation. Combined, it requests a total civil penalty of $22,736,000.
Examining the first
As described in the December Opinion, the SEC met its burden to prove on summary judgment 2,720 separate violations of Rule 17a-8 premised on thousands of deficient narratives in the SARs it filed, its failure to report the massive sell-offs of large deposits of LPS, and Alpine's failure to produce hundreds of support files as required by Section 1023.320.
The next factor to be considered in assessing a penalty is the degree of Alpine's scienter. Although a finding of scienter is not required to impose the tier-one penalty sought by the SEC, the evidence supports a finding that Alpine acted knowingly and with disregard for its obligations under the law.
Alpine's failure to acknowledge its wrongdoing throughout this litigation provides further evidence that it acted with scienter. That failure also independently counsels in favor of a substantial civil penalty. As described in the March and December Opinions, a principal defense asserted by Alpine — aside from its jurisdictional arguments — has been that Alpine had no duty to file the thousands of SARs that have been the focus of this litigation.
December Opinion, 354 F. Supp. 3d at 423 n.44.
As for the next factor, Alpine's contempt for the SAR reporting regime increased the risk to investors that they would suffer substantial losses. Alpine's violations prevented regulators from obtaining information necessary to timely investigate and squelch fraudulent and abusive trading practices. The missing information included derogatory information about a stock's issuer or the Alpine customer, the use of shell companies, or the price, volume, and timing of suspicious transactions. As the OCIE Report concluded, Alpine's failure to adequately and accurately describe the nature of suspicious activity in its SARs "rendered the SARs less valuable to investigators" and impeded their ability to understand the suspicious activity and its criminal or administrative implications. Given the sheer scale of Alpine's violations and the risk of fraud inherent in the LPS markets, Alpine's violations of Rule 17a-8 risked substantial losses to investors in those markets.
As for the fourth factor, and as already discussed, Alpine's misconduct was not isolated; it was recurrent. Alpine's violations of Rule 17a-8 occurred over the course of years. The SEC's complaint and this litigation have focused on Alpine's practices in filing and neglecting to file SARs, and in refusing to produce SAR-related files, during the period 2011 to 2015. Alpine disregarded its legal obligations regarding SARs throughout this period. The deficiencies persisted notwithstanding an intensive examination by FINRA in 2011 and a highly critical FINRA Report issued in 2012. Although the extraordinary scale of Alpine's violations decreased over the years, the violations did not cease.
As reflected in the 2014 OCIE Report, Alpine never adopted a satisfactory SAR compliance program during the period examined in this litigation. As the OCIE Report emphasized, Alpine's SARs remained woefully deficient even years after the FINRA Report issued. It reported that over 50% of the SARs OCIE reviewed omitted reference to suspicious activity of which Alpine knew at the time the SAR was filed. It further stated that "the amount and type of actual material information in SARs filed by Alpine is very similar to the sample SAR that FinCEN has identified in its public guidance as being insufficient or incomplete." The examination of individual SARs undertaken during the summary judgment process confirmed that finding.
The final
An additional factor that is relevant here is Alpine's failure to admit wrongdoing and its lack of cooperation with authorities. Much of the evidence relevant to this factor has been discussed as indicative of Alpine's scienter. Nonetheless, it bears emphasis that at no step of this eight-year saga has Alpine forthrightly confronted the glaring deficiencies in its SAR reporting regime. When new ownership took over Alpine in early 2011 it did so without putting in place a competent compliance system. While Alpine did upgrade its AML capability following the FINRA examination, it did not use the FINRA examination and the substantial guidance in the FINRA Report as an opportunity to admit its deficiencies and to thoroughly reform its practices to bring them into compliance with the law. Thus, the 2014 OCIE examination revealed that Alpine was still using boilerplate language in its SAR narratives, omitting critical information from its SARs, and acting to "obscure[] the true nature" of the suspicious activity it was assisting as a broker-dealer. Moreover, in response to the OCIE Report, Alpine repeated many of the same specious defenses that it had previously asserted during the course of the FINRA examination. In a letter of May 20, 2015, Alpine disputed each of OCIE's findings point by point, arguing that its SARs should be considered in the nature of an "alternative, voluntary filing process" and that "the process for determining whether activity is suspicious is a subjective one."
Alpine's lack of remorse and denial of wrongdoing has persisted to this day.
As noted above, the SEC seeks a civil penalty of $22,736,000. Alpine opposes the imposition of a civil penalty of this magnitude on several grounds. It suggests instead that a penalty in the range of $80,000 to $720,000, combined with certain undertakings to improve its compliance practices, would be sufficient to satisfy the punitive and deterrent purposes of the civil remedies provisions of the Exchange Act. It would not.
First, Alpine asserts that the penalty the SEC seeks is a corporate death penalty. While the SEC's requested penalty is large, so is the misconduct that prompts it. Alpine's financial records indicate that the application of [REDACTED/] of its profits would suffice to pay the penalty the SEC requests. Since the SEC has established that Alpine's systematic and widespread evasion of the law lasted more than [REDACTED/], this benchmark does not suggest that the SEC's request is out of sync with the magnitude of the violations shown.
Next, Alpine asserts that the penalty should not be set by the number of individual violations on which the SEC was granted summary judgment, but by some other less onerous method. It argues that the SEC is seeking to impose a staggering penalty by separately counting each time the same type of deficiency, which it describes as relatively few in number, affected a different SAR. For instance, by its calculation millions of dollars would be assessed for failing to report in its SARs the same customer's involvement in an ongoing regulatory action. It contends as well that the penalty requested by the SEC is higher in the aggregate than penalties imposed in other cases where there were recurrent, multi-year violations of the SAR reporting requirements. While Alpine admits that almost all of the cases to which it points were settled matters, it argues that it should not be subject to what it terms a "litigation penalty."
If coupled with prompt internal reform and a timely admission of the deficiencies in its SAR filings, Alpine's plea for alternative measures of the penalty or for a penalty set at an even more minimal level than that selected by the SEC would have more appeal. Alpine can point to neither. For at least three years after the period examined by FINRA, Alpine continued to obfuscate suspicious activity and to avoid its duties under the law. The summary judgment record confirms that Alpine's obstruction of government oversight of the LPS market was an ingrained, multi-year enterprise. Instead of undertaking the scrutiny and reporting of individual transactions required by law, Alpine chose to run a high-volume business in the LPS market and use templates for many of the SARs it filed. Even today, in its opposition to this motion for remedies, Alpine continues to minimize and excuse its offenses.
The SEC is entitled under the law to seek a penalty for each separate violation of the SAR reporting obligations. Alpine required, as it was entitled to, that the SEC separately prove with respect to each SAR that Alpine had both a duty to file the SAR, and, if it had filed one, that the SAR was legally deficient. The SEC carried that burden to the extent found in the December Opinion. For those individual SARs, and within the range of penalties permitted at tier one, the SEC has selected civil penalty amounts that fall toward to the bottom of the range.
Third, Alpine asserts that any penalty imposed for its violations of Section 17a-8 cannot exceed the penalty limits prescribed in the BSA. This argument is merely a reprise of Alpine's repeatedly rejected argument that the BSA, rather than Rule 17a-8 and the Exchange Act, provides the governing law for this case.
Finally, Alpine argues that the SEC's requested remedy would violate the Eighth Amendment's prohibition against excessive fines.
Having considered the above factors, the circumstances surrounding Alpine's 2,720 violations of Rule 17a-8, and each of Alpine's arguments in opposition to the SEC's request for remedies, a tier-one civil penalty in the amount of $12,000,000 is assessed. This penalty is substantial; it reflects the seriousness of Alpine's violations and the need for a remedy that is adequate to punish and deter such violations. A $12,000,000 penalty, however, is also a small fraction of the maximum tier-one remedies available and substantially less than the amount the SEC has requested.
In addition to civil penalties, Congress has expressly authorized the use of injunctive relief to proscribe future violations of the federal securities laws. 15 U.S.C. § 17u(d)(1). Injunctive relief is only warranted where "there is a substantial likelihood of future violations of illegal securities conduct."
For many of the reasons already discussed, a permanent injunction against further violations of Section 17(a) and Rule 17a-8 is warranted in this case. The December Opinion found Alpine liable for 2,720 violations of Rule 17a-8, which occurred over a course of years and which persisted on a systemic basis notwithstanding clear warnings by FINRA and OCIE. As discussed above, Alpine continues to maintain that many of the SARs on which summary judgment was granted were not required to be filed and to argue, in the face of clear regulatory guidance to the contrary, that it engaged in no wrongdoing. Alpine's persistent refusal to admit wrongdoing and its record of noncompliance with SAR reporting obligations demonstrate a substantial likelihood that Alpine will continue to violate federal securities laws in the future. Given its function as a broker-dealer, Alpine remains in a position where future violations could be anticipated.
The SEC's May 3 motion for remedies is granted in part. Alpine shall pay a civil penalty in the amount of $12,000,000. An injunction will be entered against Alpine.
