Two firms were penalized for anti-money laundering (AML) and supervisory violations related to low-priced securities transactions, the Financial Industry Regulatory Authority announced.
The firms, Pictet Overseas Inc. and Blue Ocean ATS, were fined a total of over $1.1 million by FINRA. Pictet was ordered to pay $610,000 for the violations, the majority of which occurred through an omnibus account held by the firm’s affiliate.
Blue Ocean was fined $550,000 for similar violations. The firm handled 95% of all overnight trading volume since its inception, including a substantial volume of low-priced securities.
FINRA stated that both firms failed to develop and implement AML compliance programs reasonably designed to detect and cause the reporting of suspicious transactions in low-priced securities.
“The thin trading volumes, price volatility and limited public information of low-priced securities make them attractive targets for manipulative schemes and fraudulent activity,” FINRA noted. “Effective AML programs are essential for firms that handle low-priced securities transactions to help detect suspicious patterns and prevent illegal activity.”
Under the settlement, Pictet and Blue Ocean consented to the entry of FINRA’s findings, without admitting or denying the charges.
“Firms that engage in high-risk business activity must implement AML programs that are appropriately designed for their specific risk profile,” said Bill St. Louis, FINRA’s Executive Vice President and Head of Enforcement. “Blue Ocean’s and Pictet’s monitoring systems were inadequate given their customers’ low-priced securities trading. These firms failed to implement the robust surveillance necessary to detect suspicious activity in an area where such risks are well-established.”
In further details about the matter, FINRA said that between February 2022 and March 2023, Pictet executed approximately $300 million worth of transactions, involving over 150 million shares. Those transactions included $30 million in over-the-counter securities, with more than 70% of these trades being executed through an omnibus account held by the firm’s foreign financial institution affiliate.(FFI)
In June 2021, another regulator alerted Pictet to certain deficiencies in its AML program but FINRA said that despite this warning and its customers’ low-priced securities transactions, Pictet failed to take timely corrective action.
“Pictet also failed to commit adequate resources to its AML program and, until February 2023, relied on manually compiled daily reports that could not effectively identify patterns of suspicious activity,” FINRA stated. “As a result, Pictet did not detect or reasonably investigate red flags of suspicious activity involving low-priced securities. This included instances where customers’ trading represented significant portions of daily market volume—in some cases, more than 20% on individual days.”
Pictet also did not implement a reasonably designed due diligence program for FFI correspondent accounts, including by failing to conduct periodic reviews of FFI account activity. Pictet’s supervisory system and procedures also were not reasonably designed to achieve compliance with Section 5 of the Securities Act of 1933 in connection with low-priced securities, according to FINRA.
With regards to Blue Ocean, FINRA said since at least January 2023, the firm failed to develop and implement an AML compliance program reasonably tailored to the risks of its business and reasonably designed to detect potentially manipulative trading. This failure occurred despite rapid growth in Blue Ocean’s overnight trading business and the known risks associated with low-priced securities trading.
Blue Ocean’s monitoring reportedly consisted primarily of manual reviews by a single employee of a wash sale report and a low-priced securities report, which were insufficient to identify patterns of potential manipulative activity.
In practice, the firm conducted no surveillance for spoofing, layering and other manipulative order entry patterns. As a result of its deficient supervision, Blue Ocean failed to detect and investigate red flags of potentially suspicious order schemes.
FINRA ordered Blue Ocean to certify that it remediated the deficiencies with its AML compliance program.
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