According to FINRA, Glendale Securities, Inc. was fined $50,000 and required to retain an independent consultant to review its anti-money laundering compliance program after failing to develop and implement an AML program reasonably designed to detect and report suspicious transactions.
The findings revealed that the firm lacked reasonable written AML procedures for surveillance of potentially suspicious transactions. The procedures failed to identify the need to monitor for sustained customer trading activity representing a significant portion of daily trading volume in thinly-traded or low-priced securities, and for trading activity with no discernable purpose or business sense. The procedures also failed to describe how supervisors should conduct monitoring, the frequency of such monitoring, or how to document investigations of potentially suspicious activity.
The firm's surveillance methods were inadequate. Its manual review of the daily trade blotter did not reflect patterns of trading across accounts or multiple days, coordinated trading between firm accounts, sustained customer trading in thinly-traded securities, or trading resulting in losses that might indicate lack of business purpose or intent to artificially support a security's price. Although the firm implemented exception reports for marking the open, marking the close, and suspicious order cancellations, it had no exception reports to alert it to other forms of suspicious and potentially manipulative trading. The written AML procedures made no reference to these exception reports or provided any information about how they should be used.
The firm also failed to reasonably detect, investigate, and respond to potentially suspicious transactions by a corporate customer. The customer made numerous purchases of small blocks of stock in an affiliated holding company that lacked business sense. These purchases consistently comprised the majority of total market volume for the issuer and occurred when there was minimal market interest, no positive issuer developments, and while both the issuer and customer were subject to negative news and reported negative cash flow. On multiple trading days, the customer placed a series of small buy orders at increasing prices, and the issuer's closing price improved from the prior trading day. The customer also engaged in multiple transactions with other firm customers, including accounts controlled by firm principals, on days when this activity comprised the majority of market volume.
This case demonstrates the critical role that AML programs play in protecting market integrity. Firms must have robust systems to detect suspicious trading patterns that may indicate market manipulation or other illicit activity. The failure to monitor for red flags such as trading that dominates market volume in thinly-traded securities, trading lacking business sense, or coordinated trading can allow manipulative schemes to flourish, ultimately harming innocent investors and undermining confidence in fair markets.
