Initiated By
FINRA
Allegations
FINRA RULES 2010, 3310(A), 3310(B), NASD RULES 2110, 3011(A), 3011(B): DAVIS' MEMBER FIRM, THROUGH DAVIS, THE FIRM'S ANTI-MONEY LAUNDERING COMPLIANCE OFFICER (AMLCO), FAILED TO IMPLEMENT PROCEDURES REASONABLY DESIGNED TO DETECT AND CAUSE THE REPORTING OF SUSPICIOUS TRANSACTIONS AND FAILED TO IMPLEMENT OR ENFORCE ITS OWN AML PROGRAM. DAVIS CREATED THE FIRM'S AML PROCEDURES AND SET UP THE FIRM'S SUPERVISORY SYSTEM. WHEN FACED WITH MANY OF THE RED FLAGS IDENTIFIED IN THE FIRM'S AML PROCEDURES, NEITHER DAVIS NOR ANYONE ELSE AT THE FIRM TOOK STEPS TO INVESTIGATE FURTHER OR GATHER INFORMATION TO DETERMINE WHETHER THE TRANSACTIONS HAD LEGITIMATE PURPOSES OR CONSTITUTED SUSPICIOUS ACTIVITY. THE FIRM, ACTING THROUGH DAVIS, FAILED TO ENFORCE ITS WRITTEN AML PROGRAM TO ENSURE COMPLIANCE WITH THE BANK SECRECY ACT. DAVIS FAILED TO IDENTIFY MULTIPLE TRANSACTIONS IN CUSTOMER ACCOUNTS WHICH TRIGGERED MANY OF THE RED FLAGS IDENTIFIED IN THE FIRM'S AML PROCEDURES. CONTRARY TO ITS AML PROCEDURES, THE FIRM DID NOT USE THE EXCEPTION REPORTS OFFERED BY ITS CLEARING FIRM, WHICH INCLUDED REPORTS THAT COULD HAVE BEEN USED TO MONITOR WIRE ACTIVITY. THE FIRM ALSO DID NOT IMPLEMENT ANY OF ITS OWN REPORTS FOR THE REVIEW OF TRADING ACTIVITY. IN MONITORING FOR SUSPICIOUS ACTIVITY, THE FIRM, THROUGH DAVIS, RELIED MAINLY ON A DAILY REVIEW OF CUSTOMER TRADES, WHICH IS INADEQUATE FOR IDENTIFYING SUSPICIOUS PATTERNS OF TRADING ACTIVITY OR OTHER AML ISSUES. DAVIS PRIMARILY MONITORED THE ACCOUNTS TO ENSURE THAT THEY CONTAINED SUFFICIENT FUNDS TO COVER WHATEVER TRANSACTION WAS BEING CONDUCTED. ALSO, AT A PERIOD, THE FIRM BEGAN USING AN INCOMING PENNY STOCK QUESTIONNAIRE, PROVIDED BY ITS CLEARING FIRM WHICH WAS INTENDED TO DOCUMENT THE SOURCE OF THE SHARES AND CONFIRM THAT THE SHARES WERE REGISTERED. EVEN WHEN THE QUESTIONNAIRE CONTAINED INFORMATION WARRANTING FURTHER INQUIRY, THE FIRM FAILED TO CONDUCT THE NECESSARY FOLLOW UP. THE FIRM, ACTING THROUGH DAVIS, ALSO FAILED TO DEVELOP AND IMPLEMENT OTHER COMPONENTS OF A REASONABLY DESIGNED AML COMPLIANCE PROGRAM (AMLCP), INCLUDING FAILING TO PROPERLY RESPOND TO REQUESTS UNDER SECTION 314(A) OF THE USA PATRIOT ACT OF 2001. THE FINANCIAL CRIMES ENFORCEMENT NETWORK (FINCEN) BEGAN ISSUING INFORMATION REQUESTS UNDER THIS NEW AUTHORITY. THE FIRM DID NOT IMPLEMENT A SYSTEM TO RESPOND TO FINCEN 314(A) REQUESTS AND HAS NOT SHOWN THAT SUCH REVIEWS WERE EVEN CONDUCTED. THE FIRM, ACTING THROUGH ITS AMLCO DAVIS, FAILED TO FOLLOW THE FIRM'S AML PROCEDURES AND DID NOT IDENTIFY, INVESTIGATE AND REPORT SUSPICIOUS ACTIVITY IN MULTIPLE INSTANCES. A REVIEW OF CUSTOMER TRANSACTIONS REVEALED RED FLAGS OF POTENTIALLY SUSPICIOUS TRANSACTIONS THAT SHOULD HAVE PROMPTED THE FIRM TO PERFORM ADDITIONAL INVESTIGATION TO DETERMINE WHETHER THE TRANSACTIONS REPRESENTED SUSPICIOUS ACTIVITY THAT NEEDED TO BE REPORTED. THE FIRM AND DAVIS PERMITTED THESE SUSPICIOUS ACTIVITIES TO OCCUR WITHOUT CONDUCTING AN ADEQUATE INVESTIGATION INTO THE ACTIVITIES AND REPORTING THE ACTIVITIES, AS APPROPRIATE. DAVIS RECEIVED ALERTS FROM THE CLEARING FIRM REGARDING INDIVIDUALS AND ENTITIES WITH SECURITIES-RELATED DISCIPLINARY HISTORIES. DAVIS WAS ALSO AWARE OF THE TRADING IN CUSTOMER ACCOUNTS AT THE FIRM. HOWEVER, THE FIRM, ACTING THROUGH DAVIS, FAILED TO ADEQUATELY IDENTIFY, INVESTIGATE AND RESPOND TO THE SUSPICIOUS TRADING ACTIVITY RELATED TO THESE CUSTOMER ACCOUNTS.
Resolution
Decision & Order of Offer of Settlement
Sanctions
Civil and Administrative Penalty(ies)/Fine(s)
Amount
$25,000.00
Sanctions
Suspension
Registration Capacities Affected
PRINCIPAL CAPACITY
Duration
THREE MONTHS
Start Date
6/2/2014
End Date
9/1/2014
Regulator Statement
WITHOUT ADMITTING OR DENYING THE ALLEGATIONS, DAVIS CONSENTED TO THE SANCTIONS AND TO THE ENTRY OF FINDINGS THAT DAVIS' FIRM, THROUGH DAVIS, THE FIRM'S AMLCO AND PRESIDENT, DEMONSTRATED AN ONGOING PATTERN OF NONCOMPLIANCE WITH AML RULES. THE FINDINGS STATED THAT THE FIRM, ACTING THROUGH DAVIS, FAILED TO ENFORCE ITS WRITTEN AML PROGRAM TO ENSURE COMPLIANCE WITH THE BANK SECRECY ACT. DAVIS FAILED TO IDENTIFY MULTIPLE TRANSACTIONS IN CUSTOMER ACCOUNTS WHICH TRIGGERED MANY OF THE RED FLAGS IDENTIFIED IN THE FIRM'S AML PROCEDURES. AMONG OTHER THINGS, THESE CUSTOMERS MAINTAINED MULTIPLE ACCOUNTS, HAD SECURITIES-RELATED DISCIPLINARY HISTORIES, ENGAGED IN SUSPICIOUS PENNY STOCK TRADES AND CONDUCTED QUESTIONABLE THIRD-PARTY WIRE ACTIVITY. THE FIRM AND DAVIS ALLOWED MULTIPLE CUSTOMERS, SOME WITH TIES TO EACH OTHER OR TO ISSUERS OF PENNY STOCKS TO LIQUIDATE BLOCKS OF STOCKS WITHOUT PROPERLY MONITORING THESE ACCOUNTS FOR SUSPICIOUS TRADING AND WIRE ACTIVITY BASED ON THE RISKS POSED BY THESE CUSTOMERS. THE FIRM AND DAVIS FAILED TO ACT UPON THESE RED FLAGS. CONTRARY TO ITS AML PROCEDURES, THE FIRM DID NOT USE THE EXCEPTION REPORTS OFFERED BY ITS CLEARING FIRM, WHICH INCLUDED REPORTS THAT COULD HAVE BEEN USED TO MONITOR WIRE ACTIVITY AND IT DID NOT IMPLEMENT ANY OF ITS OWN REPORTS FOR THE REVIEW OF TRADING ACTIVITY. THE FINDINGS ALSO STATED THAT THE FIRM AND DAVIS FAILED TO ESTABLISH AND IMPLEMENT AN ADEQUATE AML SUPERVISORY SYSTEM, REASONABLY DESIGNED TO ENSURE COMPLIANCE WITH THE BANK SECRECY ACT AND THE IMPLEMENTING REGULATIONS PROMULGATED THEREUNDER. THE FIRM AND DAVIS FAILED TO MONITOR, DETECT, AND INVESTIGATE SUSPICIOUS TRANSACTIONS IN THE FACE OF MULTIPLE RED FLAGS OF POTENTIALLY SUSPICIOUS ACTIVITY. THE FIRM AND DAVIS PERMITTED THESE SUSPICIOUS ACTIVITIES TO OCCUR WITHOUT CONDUCTING AN ADEQUATE INVESTIGATION INTO THE ACTIVITIES AND REPORTING THE ACTIVITIES, AS APPROPRIATE. DAVIS RECEIVED ALERTS FROM THE CLEARING FIRM REGARDING INDIVIDUALS AND ENTITIES WITH SECURITIES-RELATED DISCIPLINARY HISTORIES AND HE WAS AWARE OF THE TRADING IN CUSTOMER ACCOUNTS AT THE FIRM. IN THE FACE OF THESE ALERTS AND TRADING REVIEWS, AS WELL AS THE NUMEROUS RED FLAGS OF SUSPICIOUS ACTIVITY, THE FIRM AND DAVIS TOOK NO EFFECTIVE STEPS TO MONITOR SUCH TRADING, OR CURB POTENTIALLY MANIPULATIVE TRADING.
