The SEC recently charged a New York-based broker-dealer, Windsor Street Capital, L.P. (f/k/a Meyers Associates, L.P.) and John David Telfer, who acted as Windsor’s Chief Compliance and Anti-Money Laundering Officer for three-years, alleging serious Anti-Money Laundering violations. The matter is being scheduled for a public hearing before an administrative law judge, who will prepare an initial decision stating what remedial actions (including penalties and disgorgement) are appropriate. This continues a decade-old initiative by the SEC, FINRA and FinCEN of bringing significant AML cases regarding penny-stock transactions.

Under Exchange Act Section 17(a) and Rule 17a-8, the SEC charges Windsor and Telfer personally for their failures to file Suspicious Activity Reports (SARs) with FinCEN related to two customers’ sales of $24.8 million in penny stocks. In support of the charges, the SEC points to several “red flags” presented by the transactions, which took place over a four-year period. The red flags cited by the SEC include: (i) simultaneous trading activity in both customers’ accounts; (ii) a pattern of depositing shares and quickly liquidating them; and (iii) the suspicious timing of stock issuers’ press releases and online promotional campaigns with the stock sales. The SEC further criticizes Windsor and Telfer for failing to conduct minimal due diligence on certain customers – chronicling that a Google search for one of the Windsor customers would have revealed a post written on a website called “pumpanddumps.com,” one customer had previously settled an SEC enforcement action, and an affiliate had been convicted of securities fraud.

Several of the red flags the SEC relies upon are listed in Windsor’s Anti-Money Laundering (“AML”) Compliance Program. The SEC bases its individual charges against Telfer on the fact that the AML Program provides that Telfer will determine when and how to investigate a particular transaction for AML issues.

Additionally, the SEC alleges Windsor facilitated the unregistered sale of penny stocks without conducting adequate diligence to ensure that the two customers complied with Securities Act Section 5 registration requirements. Although the two customers represented that the transactions qualified for safe harbor under Rule 144, the SEC alleges that Windsor should not have taken its customers’ representations about the safe harbor at face value.

The proceeding demonstrates the SEC’s continued commitment to bring an AML enforcement proceeding even where the Company has a detailed AML Program, as well as its willingness to bring proceedings personally against the individuals charged with implementing the company’s AML Program. Moreover, the proceeding suggests that the SEC will not hesitate to charge a broker-dealer even where the commissions are relatively small – here, the allegations indicate that Windsor earned less than $500,000 in commissions and fees for the penny-stock sales, although the proceeds from the sales themselves totaled $24.8 Million.