Holland & Hart Securities Blog

SEC Files its First Anti-Money Laundering Case

Yesterday, the SEC instituted settled administrative proceedings against Los Angeles-based broker-dealer Crowell Weedon & Co.  This case is the SEC’s first anti-money laundering (AML) enforcement action based on violations of the Patriot Act. [1] According to the SEC, the broker-dealer failed to document properly its actual procedures employed in its written customer identification program (CIP).  In verifying the identities of approximately 2,900 customers, Crowell, Weedon simply relied on its registered representatives' attestations that they had personal knowledge of the new customers, a practice not documented in the firm's written CIP.   The SEC alleged that in contrast, the firm’s CIP specified that it would verify the identity of each new customer using certain non-documentary and documentary procedures, such as a public database search and reviewing government-issued identification.

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[1] See press release available at http://www.sec.gov/news/press/2006/2006-78.htm.

SEC Investigates Stock Option Backdating

            The SEC is expanding its previously disclosed probe of stock-options backdating by numerous publicly held companies. According to a May 6, 2006 Wall Street Journal article, at least ten companies are involved in multiple investigations by the SEC and the U.S. Attorney’s Office for the Eastern District of New York.  Several of these companies have admitted that back-dating did in fact occur.

Liability of Investor Relations Firms Involved in Publicity Campaigns

             Like many of  you, I am the recipient of numerous unwanted “junk faxes” touting the stocks of publicly traded microcap companies.  On April 27, 2006, someone sent me a junk fax recommending the stock of Toronto-based Phinder Technologies, Inc. (“Phinder”), which was portrayed as having “very strong potential.”  At first blush, it seems unlikely that anyone would buy stock based on an anonymous junk fax.  However, the persistence of these publicity campaigns indicates that they have the desired effect of creating short-term investor interest. Apparently due to the junk faxes, about $50,000 of Phinder stock traded on April 27 alone.  This is an impressive feat, considering that the company has reported operating losses, and its audit opinion has a “going concern” qualification.  Besides providing a window into the OTC market, the Phinder publicity campaign illustrates the liability issues faced by investor relations firms that publicize stocks through the use of unsolicited faxes, e-mails and other aggressive means.   

Dismissal of Indictment Due to SEC’s Failure to Disclose Pending Criminal Investigation

      

          The SEC has a longstanding policy of refusing to disclose known parallel criminal investigations.   In U.S. v. Stringer, 408 F. Supp. 2d 1083 (D. Oregon 2006), a U.S. District Court dismissed the government’s securities fraud indictment against several former executives of FLIR Systems, Inc., due primarily to the conduct of SEC enforcement attorneys who followed this policy.  Stringer signals that at the beginning of any SEC testimony, defense lawyers should make a record of inquiring about related criminal matters.