According to FINRA, MM Global Securities, Inc. was fined $450,000 and prohibited from providing market access to customers for two years for failing to establish and implement an AML compliance program reasonably designed to detect and report suspicious activity.
The findings revealed severe deficiencies in the firm's AML program. The procedures did not identify any types of manipulative trading such as wash trades, matched orders, spoofing, or layering, and failed to describe how the firm would detect such trading. The firm never created parameters for trade review and wire transfers to determine whether transactions lacked financial sense or were suspicious, and the procedures did not describe how parameters should be set. Furthermore, the firm's AML procedures did not identify any exception reports to detect unusual transactions, did not describe how supervisors should use such reports, or what activity should trigger further action.
Instead of using exception reports or automated tools to detect suspicious activity such as cancelled orders, patterns of trading across accounts or multiple days, coordinated trading, or trading resulting in losses indicating lack of rational economic motive, the firm relied almost exclusively on a manual review of the daily trade blotter. This approach was unreasonable given the volume and complexity of trading by the firm's customers. As a result of these failures, the firm did not detect, investigate, or respond to red flags of suspicious activities and failed to investigate additional suspicious activity even after it was brought to the firm's attention.
The firm also failed to implement its Customer Identification Program for retail and institutional customer accounts in foreign jurisdictions. It only collected basic information and conducted OFAC checks when opening accounts, failing to implement its CIP for at least four individual customers in China and a customer located in a jurisdiction designated by the U.S. as a major money laundering jurisdiction.
Additional violations included failing to reasonably supervise for potentially manipulative trading. The firm's procedures were not reasonably designed to detect potentially manipulative transactions or patterns over time. As a result, the firm failed to detect potential market manipulation including matched orders in a company's stock. Even when potential market manipulation was brought to the firm's attention by FINRA and its clearing broker, the firm unreasonably relied on unverified representations from the customer about steps to prevent future manipulation.
FINRA also found that the firm failed to preserve instant messages and email communications of its registered representatives discussing securities-related business with another firm, including referrals of prospective IPO investors and account applications. The firm was aware of these communications but took no steps to preserve them.
This case illustrates the serious consequences when firms fail to maintain adequate AML and supervisory systems, particularly when providing market access. The two-year prohibition from providing market access reflects the severity of the violations and the risk posed to market integrity. Investors should be aware that firms facilitating market access have heightened obligations to detect and prevent potentially manipulative trading, and failures in these areas can enable bad actors to manipulate securities prices to the detriment of innocent investors.
