A Financial Industry Regulatory Authority extended hearing panel has ordered brokerage firm C.L. King & Associates, Inc. to pay a $750,000 for purportedly acting negligently by making material representations and omissions to issuers in connections with debt securities redemptions for a hedge fund customer. The panel said that the broker-dealer and Gregg Alan Miller, its Anti-Money Laundering Compliance Officer, did not put into place a reasonable AML program and failed to adequately react to red flags indicating that the liquidation of billions of penny stock shares involving two customers might be signs of suspect activity. Miller has been suspended from fulfilling a principal role for half a year and he must pay a $20K fine.
Per the hearing panel’s ruling, the hedge fund’s manager set up joint accounts at the firm. A number of terminally ill people were given joint tenancy with survivorship rights to the accounts and they were paid $10K, after which they gave up their ownership rights to the assets in the accounts.
The accounts were used to buy corporate bonds at reduced rates that came with a survivor option. This feature made it possible for the manager, as the survivor of the joint account, to redeem investments from issuers through the brokerage firm for the full principal figure prior to maturity once the joint tenant had died. The FINRA panel said that CL King had a duty to let issuers know when the redemption process was taking place that the joint tenants that were terminally ill and not beneficiaries of the investments.
Also, according to the panel, from 2009 to 2014, CL King sold billions of penny stock shares for two customers, including a bank in Liechtenstein that sold 41 million of these shares. This created over $4.8M in proceeds while the other customer sold over 11 billion shares in 138 stocks for proceeds totaling over $14M. The panel said that Miller and CL King did not customize its AML program to the risks involved in its penny stock business and failed to monitor trading activity warning of possible money laundering.
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FINRA says CL King is fined $750,000 related to ‘death put’ investments, anti-money laundering violations, Reuters, September 12, 2017