Initiated By
FINRA
Allegations
MORRIS WAS NAMED A RESPONDENT IN A FINRA COMPLAINT ALLEGING THAT HIS MEMBER FIRM, THROUGH MORRIS AND ANOTHER PRINCIPAL, ENTERED INTO A FRAUDULENT SCHEME WITH A VENTURE CAPITAL FIRM AND A CANCER DRUG DEVELOPMENT COMPANY TO SECRETLY KICK BACK NEARLY FIVE PERCENT OF THE VENTURE CAPITAL FIRM'S $35 MILLION INVESTMENT IN THE CANCER DRUG DEVELOPMENT COMPANY TO THE VENTURE CAPITAL FIRM AND THEREBY MISREPRESENT THE PRICE PAID FOR THE SHARES. THE FIRM EXECUTED AN ENGAGEMENT LETTER AND AGREED TO SERVE AS A FAKE PLACEMENT AGENT FOR AN ISSUANCE OF UP TO $40 MILLION OF THE DEVELOPMENT COMPANY'S SECURITIES TO THE VENTURE CAPITAL FIRM AND RECEIVE A FEE OF FIVE PERCENT OF THE VENTURE CAPITAL FIRM'S INVESTMENT. THE RESPONDENT WAS AWARE THAT THE ENGAGEMENT LETTER WAS FALSE AND CONTAINED MISREPRESENTATIONS AND OMISSIONS. THE RESPONDENT WAS AWARE THAT THE CONSULTING AGREEMENTS WITH THE AFFILIATE WERE FALSE AND CONTAINED MATERIAL MISREPRESENTATIONS AND OMISSIONS. THE SOLE, UNDISCLOSED PURPOSE OF THE CONSULTING AGREEMENTS WAS TO ENABLE THE KICK BACK. THE RESPONDENT VIOLATED SECTION 10B-5 OF THE EXCHANGE ACT OF 1934, RULE 10B-5(A) AND (C) THEREUNDER. THE COMPLAINT ALLEGES THAT THE FIRM AND MORRIS FACILITATED A NOW-EXPELLED FINRA FIRM'S CONCEALMENT OF ITS RECEIPT OF ADDITIONAL TRANSACTION FEES FROM LATERAL TRANSFER SELLERS, AND DID NOT DISCLOSE ITS COMMISSION-SHARING AGREEMENT WITH THE NOW-EXPELLED FINRA FIRM TO THE LATERAL TRANSFER SELLERS. THE COMPLAINT ALSO ALLEGES THAT THE FIRM AND MORRIS CAUSED THE FIRM TO CREATE AND MAINTAIN FALSE BOOKS AND RECORDS, BY CAUSING THE FALSIFICATION OF NEW ACCOUNT DOCUMENTS, TRADE CONFIRMATIONS AND ACCOUNT STATEMENTS. SPECIFICALLY, THE FIRM AND MORRIS COVERED UP A NOW-BARRED REGISTERED REPRESENTATIVE'S VIOLATION OF VARIOUS STATE BLUE SKY LAWS BY INTENTIONALLY CAUSING THE FALSIFICATION OF THE FIRM'S BOOKS AND RECORDS, INCLUDING CUSTOMER ACCOUNT STATEMENTS, NEW ACCOUNT DOCUMENTS, TRADE CONFIRMATIONS AND COMMISSION RUNS, TO INACCURATELY REFLECT THAT ANOTHER REGISTERED REPRESENTATIVE AT THE FIRM, IN SOME INSTANCES MORRIS, WAS THE REPRESENTATIVE OF RECORD FOR CUSTOMER TRANSACTIONS INITIATED BY THE NOW-BARRED REGISTERED REPRESENTATIVE. MORRIS WAS NOT ONLY AWARE OF THIS REPRESENTATIVE'S FALSIFICATION OF THE FIRM'S BOOKS AND RECORDS, HE ASSISTED WITH THE FALSIFICATIONS. THE COMPLAINT FURTHER ALLEGES THAT THE FIRM AND MORRIS FAILED TO ESTABLISH AND IMPLEMENT POLICIES AND PROCEDURES THAT CAN BE REASONABLY EXPECTED TO DETECT AND CAUSE THE REPORTING OF TRANSACTIONS REQUIRED UNDER THE BANK SECRECY ACT, 31 U.S.C. SECTION 5318(G), AND ITS IMPLEMENTING REGULATIONS THEREUNDER IN CONTRAVENTION OF FINRA RULE 3310(A). THE FIRM ALSO FAILED TO MONITOR CUSTOMER ACCOUNT ACTIVITY AND FOLLOW UP ON AML RED FLAGS REGARDING ITS PENNY STOCK LIQUIDATION BUSINESS AND ABDICATED SOME OF ITS RESPONSIBILITY TO THE CLEARING FIRM. IN ADDITION, THE COMPLAINT ALLEGES THAT WHILE DESIGNATED AS THE FIRM'S ANTI-MONEY LAUNDERING COMPLIANCE OFFICER (AMLCO), MORRIS DID NOT HAVE THE REQUISITE KNOWLEDGE, TRAINING AND EXPERIENCE TO ADEQUATELY DISCHARGE HIS DUTIES AS AMLCO. AS A RESULT, THE FIRM FAILED TO DESIGNATE A QUALIFIED AMLCO. MOREOVER, THE COMPLAINT ALLEGES THAT THE RESPONDENT FAILED TO REASONABLY SUPERVISE THE ACTIVITIES AT THE FIRM. NAMELY, THE ACTIVITIES OF REGISTERED REPRESENTATIVES, REGISTERED PRINCIPALS, AND OTHER ASSOCIATED PERSONS IN A MANNER REASONABLY DESIGNED TO ACHIEVE COMPLIANCE WITH FEDERAL SECURITIES LAWS AND FINRA RULES AND TO PREVENT AND DETECT MISCONDUCT. INSTEAD, THE RESPONDENT FOSTERED A CULTURE OF NON-COMPLIANCE THAT RESULTED IN WIDESPREAD SUPERVISORY FAILURES AND VIOLATIONS OF FEDERAL SECURITIES LAWS AND FINRA RULES.
Resolution
Decision & Order of Offer of Settlement
Bar
Bar (Permanent)
Registration Capacities Affected
All Capacities
Start Date
10/6/2015
Sanctions
Morris willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) thereunder.
Regulator Statement
Without admitting or denying the allegations, Morris consented to the sanction and to the entry of findings that his firm, through him, entered into a fraudulent scheme with a venture capital firm and a cancer drug development company to secretly kick back nearly 5 percent of the venture capital firm's $35 million investment in the cancer drug development company to the venture capital firm, and thereby misrepresent the price paid for the shares.
Morris willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) thereunder. The firm executed an engagement letter and agreed to serve as a fake placement agent for an issuance of up to $40 million of the development company's securities to the venture capital firm and receive a fee of 5 percent of the venture capital firm's investment. Morris was aware that the engagement letter was false and contained misrepresentations and omissions. Morris was aware that the consulting agreements with an affiliate of the venture capital firm were false and contained material misrepresentations and omissions. The sole, undisclosed purpose of the consulting agreements was to enable the kick back.
Morris facilitated a now-expelled FINRA firm's concealment of its receipt of additional transaction fees from lateral transfer sellers, and did not disclose its commission-sharing agreement with the now-expelled FINRA firm to the lateral transfer sellers.
Morris covered up a now-barred registered representative's violation of various state Blue Sky Laws by intentionally causing the falsification of the firm's books and records, including customer account statements, new account documents, trade confirmations and commission runs, to inaccurately reflect that another registered representative at the firm, in some instances Morris, was the representative of record for customer transactions the now-barred registered representative initiated. Morris was not only aware of this representative's falsification of the firm's books and records, he assisted with the falsifications. By doing so, the firm and Morris caused the firm to create and maintain false books and records.
The firm, through the now-barred registered representative, engaged in churning and excessive trading in customer accounts. These customers did not authorize many of the individual trades the representative placed in their accounts, and the representative effectively controlled the trading in these accounts. The customer did not derive any benefit from the excessive trading in their accounts, and the representative and the firm reaped unwarranted commissions to the detriment of the customers.
Morris failed to establish and implement an adequate AML compliance program reasonably designed to cause the detection and reporting of suspicious activities required under the Bank Secrecy Act and its implementing regulations thereunder. The firm also failed to monitor customer account activity and follow up on AML red flags regarding its penny stock liquidation business and abdicated some of its responsibility to the clearing firm.
While designated as the firm's AMLCO, Morris did not have the requisite knowledge, training and experience to adequately discharge his duties as AMLCO. As a result, the firm failed to designate a qualified AMLCO.
Morris, as principal, chief executive officer, failed to establish and implement an adequate supervisory system and WSPs. The firm failed to reasonably supervise churning and excessive trading, unauthorized trading, firm email review and registered persons subject to heightened supervision. Instead, the firm and Morris fostered a culture of non-compliance that resulted in widespread supervisory failures and violations of federal securities laws and FINRA rules.
Broker Comment
HALCYON AND ITS PRINCIPALS DENY THOSE ALLEGATIONS AND CONFIRM THAT IT MORE THAN A YEAR AGO TERMINATED THE PARTICULAR BROKER INVOLVED IN THE ALLEGED CHURNING AND THE FAILURE TO SUPERVISE CLAIM, NAMED A NEW AML CO, AND REVISED AND UPDATED ITS AML POLICY AND WSPS. THE FIRM MAINTAINS THAT NEITHER THE FIRM NOR ITS PRINCIPALS ENGAGED IN ANY VIOLATION OF THE SECURITIES LAWS AND RULES AND INTEND TO DEFEND THE CLAIMS. Halcyon and its Principals ultimately decided to agree to a settlement with FINRA based on a number of issues including the cost associated with litigation of the matter.
