Montreal-based broker-dealer, Pictet Overseas Inc., and an alternative trading system based in Florida, Blue Ocean ATS, are being sanctioned for alleged anti-money laundering failures and penny stock oversight breaches in settlements with the U.S. Financial Industry Regulatory Authority Inc. (FINRA).
Pictet was fined US$610,000, and Blue Ocean was ordered to pay US$550,000 in settlements with the U.S. self-regulatory organization, which alleged that the firms both failed to develop adequate compliance programs to detect and report suspicious transactions in penny stocks — which are vulnerable to fraud and market manipulation, given their high volatility, lack of liquidity and the limited disclosure provided by these kinds of companies.
Both firms settled the SRO’s allegations without admitting or denying the allegations, and consenting to the entry of FINRA’s findings.
According to FINRA, between February 2022 and March 2023, Pictet executed approximately US$300 million worth of transactions, involving over 150 million shares. Those transactions included US$30 million in over-the-counter (OTC) securities — with more than 70% of these trades being executed through an affiliate’s omnibus account, which was used by some clients that were financial firms based in jurisdictions known for financial secrecy.
“Despite the risks of low-priced securities trading, Pictet’s AML policies and procedures did not reasonably address how the firm would detect and investigate suspicious trading involving low-priced securities,” the SRO alleged.
While the firm’s policies directed personnel to monitor trading activity for red flags of potential market manipulation, or other misconduct, those policies didn’t specify how to detect or investigate those red flags, FINRA said — nor did they establish when to escalate the discovery of potentially suspicious trading activity for possible reporting.
Among other things, the SRO also alleged that the firm didn’t adequately resource its AML compliance program, and didn’t have adequate procedures for conducting due diligence on its correspondent accounts for other financial firms.
In the case against Blue Ocean, the regulator alleged that the firm also didn’t have adequate policies in place to detect and report suspicious penny stock trading activity, and that its supervisory procedures — which relied on manual reviews of trading activity — didn’t address the risks that were relevant to its business.
“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, executive vice-president and head of enforcement at FINRA, in a statement.
“Blue Ocean’s and Pictet’s monitoring systems were inadequate given their customers’ low-priced securities trading,” he added. “These firms failed to implement the robust surveillance necessary to detect suspicious activity in an area where such risks are well-established.”
According to the settlements, Pictet has since beefed up its AML policies and procedures, and Blue Ocean agreed to an undertaking to certify within 180 days that it has made the necessary compliance improvements.