U.S. Sec. & Exch. Comm'n v. Alpine Sec. Corp.

• Decision Date: 12 September 2019
• Docket Number: 17cv4179(DLC)
• Citation: 413 F.Supp.3d 235
• Parties: UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ALPINE SECURITIES CORPORATION, Defendant.
• Court: U.S. District Court — Southern District of New York

413 F.Supp.3d 235

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.ALPINE SECURITIES CORPORATION, Defendant.

17cv4179(DLC)

United States District Court, S.D. New York.

Signed September 12, 2019

Filed September 26, 2019

For the plaintiff: Zachary T. Carlyle, Terry R. Miller, U.S. Securities and Exchange Commission, 1961 Stout Street, 17th Floor, Denver, CO 80294.

For the defendant: Maranda E. Fritz, Thompson Hine LLP, 335 Madison Avenue, 12th Floor, New York, NY 10017, Brent R. Baker, Aaron D. Lebenta, Jonathan D. Bletzacker, Clyde Snow & Sessions, One Utah Center, 201 South Main Street, Suite 1300, Salt Lake City, Utah 84111.

AMENDED REDACTED OPINION AND ORDER

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.

Background

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. See SEC v. Alpine Sec. Corp., 308 F. Supp. 3d 775 (S.D.N.Y. 2018) (" March Opinion"); SEC v. Alpine Sec. Corp., 354 F. Supp. 3d 396 (S.D.N.Y. 2018) (" December Opinion").¹ Familiarity with those Opinions is assumed and they are incorporated by reference.

The Low-Priced Securities Market

Alpine principally provides brokerage clearing services for penny stocks and microcap securities traded in the over-the-counter market.² The markets for these low-priced securities ("LPS") are rife with fraud and abuse. The Penny Stock Reform Act of 1990, for example, identified as problems with the penny stock markets "a serious lack of adequate information concerning price and volume of penny stock transactions," involvement by individuals banned from the securities markets in roles such as "promoters" or "consultants," and the use of shell corporations to facilitate market manipulation schemes. Pub. L. No. 101-29, § 502(6)-(8), 104 Stat. 931, 951; see also December Opinion, 354 F. Supp. 3d at 406.

Financial regulators like FINRA,³ FinCEN,⁴ and the SEC have warned investors of the risks of fraud connected to investments in LPS. FINRA has warned investors, in particular, about the risk that the issuer of a penny stock may be a shell company for those seeking to launder money or conduct illicit activity.⁵ The SEC 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."⁶

Regulatory Framework

The Bank Secrecy Act ("BSA"), 31 U.S.C. § 5311, et seq., first enacted in 1982, requires broker-dealers like Alpine to file SARs. Under the BSA, the Secretary of the Treasury may "require any financial institution ... to report any suspicious transaction relevant to a possible violation of law or regulation." 31 U.S.C. § 5318(g)(1). The Secretary has delegated this authority to FinCEN,⁷ and, in 2002, the Treasury Department and FinCEN promulgated 31 C.F.R. § 1023.320 (" Section 1023.320").⁸

As described in greater detail in the December Opinion, Section 1023.320 provides that "[e]very broker or dealer in securities within the United States ... shall file with FinCEN, to the extent and in the manner required by this section, a report of any suspicious transaction relevant to a possible violation of a law or regulation." 31 C.F.R. § 1023.320(a)(1) (emphasis added). Under Section 1023.320, a transaction requires reporting if it is "conducted or attempted by, at, or through a broker-dealer," "involves or aggregates funds or other assets of at least $5,000," and the broker-dealer "knows, suspects, or has reason to suspect" that the transaction (or pattern of transactions) "[i]nvolves use of the broker-dealer to facilitate criminal activity." Id. § 1023.320(a)(2)(iv).

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." Id. § 1023.320(d). It further requires a broker-dealer to "make all supporting documentation available to FinCEN or any Federal, State, or local law enforcement agency, or any Federal regulatory authority that examines a broker-dealer for compliance with the Bank Secrecy Act, upon request." Id.

SARs are currently submitted to FinCEN via an electronic SAR Form.⁹ The SAR Form states that the narrative section of the SAR "is critical ." 2002 SAR Form at 3 (emphasis in original). It further provides,

The care with which [the narrative section] is completed may determine whether or not the described activity and its possible criminal nature are clearly understood by investigators. Provide a clear, complete and chronological description ... of the activity, including what is unusual, irregular or suspicious about the transaction(s), using the checklist below as a guide.

Id. (emphasis in original).

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. See 354 F. Supp. 3d at 415. 1

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, et seq., and SEC Rule 17a-8. Rule 17a-8 requires a broker-dealer to "comply with the reporting, recordkeeping and record retention requirements of chapter X of title 31 of the Code of Federal Regulations." 17 C.F.R. § 240.17a-8. The reporting, recordkeeping, and retention requirements incorporated by Rule 17a-8 include those described in Section 1023.320. See December Opinion, 354 F. Supp. 3d at 411-12.

Alpine's Failure to Comply with SAR Regulations

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.¹⁰

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 any SARs for over six months in 2011 (from March 1 through May 10, and from August 16 through December 19). FINRA concluded that the SARs Alpine later filed for transactions occurring during this period were all filed late. The FINRA Report concluded more generally that Alpine had "failed to establish and enforce procedures reasonably designed to detect and report suspicious activity."

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. See December Opinion, 354 F. Supp. 3d at 420.

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...