First Manhattan Co., a New York broker-dealer, has been fined $250,000 for failing to adequately establish and maintain a supervisory system that would have alerted the firm to trading and anti-money laundering violations regarding microcap securities, according to Finra.
The investigation into these violations was launched after the firm submitted a Form U5 related to the discharge of its compliance officer in June 2020, according to a Finra filing last week. In that disclosure, the broker-dealer, which has 96 registered representatives and two branch offices, stated it had discharged the compliance officer because of a “loss of trust and confidence regarding [her] compliance responsibilities,” the filing said.
On March 19, 2021, Finra did make a preliminary determination to recommend that disciplinary action be brought against the compliance officer, but as of press time no such action has been taken, according to BrokerCheck and a search of Finra’s records.
Andrew Aspen, First Manhattan’s chief legal officer, did not return a call by press time.
Between January 2012 and May 2020, First Manhattan’s business focused on advisory accounts for high-net-worth individuals and family offices, in which trades in microcap securities represented less than 1% of total revenue, the Finra filing said.
The firm’s leading customer in microcap trades was an immediate family member of the compliance officer, the filing said, adding that at all relevant times the compliance officer had responsibility for First Manhattan’s compliance and anti-money laundering programs—while also being the registered rep for her family member’s account.
The filing alleged that First Manhattan violated Section 5 of the Securities Act, which prohibits the sale of any security unless there is a registration statement in effect for that security or an exemption or safe harbor for that transaction, and Finra rules that require the detection and reporting of suspicious money-laundering activity. In 2009, Finra issued a notice reminding firms that they had to have procedures “designed to avoid becoming participants in the potential unregistered distribution of securities.”
Some red flags included situations when an issuer had recently changed its name several times or recapitalized, or when “a customer has a pattern of depositing physical share certificates, immediately selling the shares and then wiring out the proceeds.”
Not only did First Manhattan not have written supervisory procedures (WSPs) that would raise alarm around any of these red flags, the filing alleged, the firm also lacked any procedures for conducting a inquiry to see if a transaction was in compliance. “Instead, First Manhattan’s WSPs only stated that [the compliance officer] should be consulted for assistance,” the filing said.
Allegedly, from May 2015 through May 2020, the compliance officer’s family member made 55 deposits of microcap securities, many of which involved issuers that had recently changed their names and lines of business. “Frequently, [this customer] deposited physical share certificates, sold the shares within days or weeks, and then immediately wired out the proceeds,” the filing said. “Those red flags notwithstanding, First Manhattan accepted 25 of [this customer’s] 55 deposits even though no pre-clearance form had been completed and, therefore, the firm had no information to determine whether the securities were registered or exempt from registration.”