Broker Fails To Beat SEC Suit Over Sloppy Activity Reports
Share us on: By Jack Newsham
Law360 (April 2, 2018, 7:49 PM EDT) -- A Manhattan federal judge gave the U.S. Securities and Exchange Commission a partial victory in its suit against a brokerage firm that allegedly failed to file clear and timely Suspicious Activity Reports, ruling Friday that a sample of SARs the agency flagged were “woefully inadequate.”
Alpine Securities Corp., a Utah-based broker that clears trades involving securities that trade for a few cents or fractions of a penny, is said by the SEC to have omitted crucial information from thousands of SARs for years. Alpine said the SEC lacks the authority to enforce SAR requirements, but U.S. District Judge Denise Cote called its case “unpersuasive.”
Since 1981, the SEC has required broker-dealers to follow regulations the U.S. Department of the Treasury created under the Bank Secrecy Act to report potentially illegal activity, but Alpine argued that the SEC overstepped its legal powers. The court said federal securities laws give the agency “broad authority” over broker-dealers, however, including the power to police their SAR practices.
“It is reasonable to conclude that the same reports that help the Treasury target illegal securities transactions for its purposes also help protect investors by providing information to the SEC that may be relevant to whether a stock or a market is being manipulated in violation of the nation’s securities laws,” Judge Cote wrote.
“Alpine resists this conclusion by arguing that the SEC may not incorporate the regulations of another agency,” she continued. “Not surprisingly, Alpine does not cite any authority to support that counterintuitive proposition.”
According to the decision, Alpine also argued that it should prevail because it wasn’t accused of negligently or willfully failing to file SARs. The judge rejected that defense, saying a showing of carelessness or purposefulness wasn’t required under the law cited by the SEC, Section 17(a) of the Exchange Act.
Turning to the SEC’s motion for summary judgment, the court sided with the agency on all but one of the issues it raised with Alpine’s SAR practices. The broker omitted required information from more than a dozen reports flagged by the SEC, the court found, often including facts about the transaction but not indicating why they were suspicious.
The court conditionally sided with the regulator over its claim that Alpine failed to file follow-up SARs on three customers that deposited huge amounts of penny stocks, then gradually sold them off. The agency also prevailed on its claim over late-filed reports, although Judge Cote rejected its bid for a quick win on its claim that Alpine didn’t retain required documents, saying the SEC didn’t show it had searched for them.
The SEC doesn’t comment on pending cases. But Maranda Fritz, a lawyer for Alpine, said in an email to Law360 on Monday the company was considering an appeal.
“We’re very disappointed that the court failed to address the law establishing that the SEC does not have enforcement authority over the Bank Secrecy Act and so cannot pursue this kind of enforcement action,” she wrote. “Because this was an important issue of first impression, and given the clarity of the law on the issue, we’re now evaluating our appellate options and look forward to having the issue considered by the Second Circuit.”
The SEC in its complaint said the Financial Industry Regulatory Authority has filed a number of disciplinary actions against Alpine, including for failure to maintain adequate written supervisory procedures and for participating in unregistered offerings and sales of securities.
Alpine is owned by John Hurry, a principal of Scottsdale Capital Advisors Corp., an introducing broker that sends Alpine much of its business, including a majority of the transactions contained in the complaint, the SEC said. Last year, the U.S. Supreme Court refused to hear Scottsdale's unrelated challenge to FINRA's authority to bring Securities Act charges.
The SEC is represented by its own Zachary T. Carlyle and Terry R. Miller.
Alpine is represented by Maranda E. Fritz of Thompson Hine LLP, and Brent R. Baker, Aaron D. Lebenta and Jonathan D. Bletzacker of Clyde Snow & Sessions PC.
The case is SEC v. Alpine Securities Corp., case number 7:17-cv-04179, in the U.S. District Court for the Southern District of New York.
Share us on: By Jack Newsham
Law360 (April 2, 2018, 7:49 PM EDT) -- A Manhattan federal judge gave the U.S. Securities and Exchange Commission a partial victory in its suit against a brokerage firm that allegedly failed to file clear and timely Suspicious Activity Reports, ruling Friday that a sample of SARs the agency flagged were “woefully inadequate.”
Alpine Securities Corp., a Utah-based broker that clears trades involving securities that trade for a few cents or fractions of a penny, is said by the SEC to have omitted crucial information from thousands of SARs for years. Alpine said the SEC lacks the authority to enforce SAR requirements, but U.S. District Judge Denise Cote called its case “unpersuasive.”
Since 1981, the SEC has required broker-dealers to follow regulations the U.S. Department of the Treasury created under the Bank Secrecy Act to report potentially illegal activity, but Alpine argued that the SEC overstepped its legal powers. The court said federal securities laws give the agency “broad authority” over broker-dealers, however, including the power to police their SAR practices.
“It is reasonable to conclude that the same reports that help the Treasury target illegal securities transactions for its purposes also help protect investors by providing information to the SEC that may be relevant to whether a stock or a market is being manipulated in violation of the nation’s securities laws,” Judge Cote wrote.
“Alpine resists this conclusion by arguing that the SEC may not incorporate the regulations of another agency,” she continued. “Not surprisingly, Alpine does not cite any authority to support that counterintuitive proposition.”
According to the decision, Alpine also argued that it should prevail because it wasn’t accused of negligently or willfully failing to file SARs. The judge rejected that defense, saying a showing of carelessness or purposefulness wasn’t required under the law cited by the SEC, Section 17(a) of the Exchange Act.
Turning to the SEC’s motion for summary judgment, the court sided with the agency on all but one of the issues it raised with Alpine’s SAR practices. The broker omitted required information from more than a dozen reports flagged by the SEC, the court found, often including facts about the transaction but not indicating why they were suspicious.
The court conditionally sided with the regulator over its claim that Alpine failed to file follow-up SARs on three customers that deposited huge amounts of penny stocks, then gradually sold them off. The agency also prevailed on its claim over late-filed reports, although Judge Cote rejected its bid for a quick win on its claim that Alpine didn’t retain required documents, saying the SEC didn’t show it had searched for them.
The SEC doesn’t comment on pending cases. But Maranda Fritz, a lawyer for Alpine, said in an email to Law360 on Monday the company was considering an appeal.
“We’re very disappointed that the court failed to address the law establishing that the SEC does not have enforcement authority over the Bank Secrecy Act and so cannot pursue this kind of enforcement action,” she wrote. “Because this was an important issue of first impression, and given the clarity of the law on the issue, we’re now evaluating our appellate options and look forward to having the issue considered by the Second Circuit.”
The SEC in its complaint said the Financial Industry Regulatory Authority has filed a number of disciplinary actions against Alpine, including for failure to maintain adequate written supervisory procedures and for participating in unregistered offerings and sales of securities.
Alpine is owned by John Hurry, a principal of Scottsdale Capital Advisors Corp., an introducing broker that sends Alpine much of its business, including a majority of the transactions contained in the complaint, the SEC said. Last year, the U.S. Supreme Court refused to hear Scottsdale's unrelated challenge to FINRA's authority to bring Securities Act charges.
The SEC is represented by its own Zachary T. Carlyle and Terry R. Miller.
Alpine is represented by Maranda E. Fritz of Thompson Hine LLP, and Brent R. Baker, Aaron D. Lebenta and Jonathan D. Bletzacker of Clyde Snow & Sessions PC.
The case is SEC v. Alpine Securities Corp., case number 7:17-cv-04179, in the U.S. District Court for the Southern District of New York.
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