On 12 September, FINRA fined BD and CCO death put investment, AML.

  • C.L. King & Associates, fined $750k for negligent misrepresentations, omissions.
  • AML compliance officer, Gregg Miller, suspended six months in principal capacity.
  • Fined $20,000, for failing to establish and implement a reasonable AML program.
  • Decision resolves FINRA April 2016 charges brought by enforcement department.

Death Puts

  • Hedge fund opened joint accounts, at CL King, with terminally ill as joint tenant.
  • Manager and fund obtained referrals to open joint account, from a hospice in NJ.
  • Fund paid terminally ill person $10k to agree to open account for fund manager.
  • Strategy used account to buy discounted corporate bonds with death put option.
  • Put allowed fund, as joint account survivor, to redeem investments from issuers.
  • Redeemed via CL King, for full principal before maturity, on death of joint tenant.

Negligence on Puts

  • Negligent misrepresentation and omission on redemption of debt for hedge fund.
  • C.L. King had obligation to disclose to issuers during the redemption process that
    the terminally ill joint tenants were not in fact the beneficial owners of the bonds.
  • As the hedge fund required the terminally ill to sign side agreement in which they
    agreed to give up their ownership rights to those assets held within joint accounts.

AML Violations

  • C.L. King also sold billions of penny stocks on behalf of two customers in 2009-14.
  • One customer, a Liechtenstein bank, sold 41mn shares of 40 issues, value $4.8mn.
  • Second customer sold 11bn shares in 138 stocks, having proceeds of over $14mn.
  • C.L. King and Miller did not tailor AML program to the risk of penny stock business.

Negligence on AML

  • Did not monitor customers’ trading activity for red flags indicative of potential AML.
  • Issuers whose stock were sold, had little or no revenue, history of doing business.
  • Stocks often subject of promotions on internet around time customers sold shares.
  • Promotional activity was a red flag, suggesting possible pump-and-dump schemes.
  • Both customers sometimes sold, large percentage of an issue’s outstanding shares.
  • Defendants failed to conduct due diligence of trading activity at Liechtenstein bank.
  • Bank was foreign financial institution under BSA, requiring heightened assessment.