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The Securities and Exchange Commission recently accused a Florida broker-dealer, Park Financial Group Inc., and its principal, Gordon C. Cantley, of violating the USA Patriot Act. The SEC alleges that Park and Cantley aided and abetted a pump and dump fraud scheme perpetrated by Dennis P. Crowley, the former chief executive officer of Spear & Jackson Inc., a Nevada based tool maker. Significantly, the SEC also charged Park and Cantley with violating the anti-money laundering provisions of the USA Patriot Act by failing to file Suspicious Activity Reports (SARs). This is the first time that the SEC has brought an enforcement action based on a broker-dealer’s failure to file SARs. The SEC frequently asserts new bases of liability in egregious cases and then exports these bases to more mainstream cases. Broker-dealers, therefore, should expect and prepare for increased scrutiny concerning the filing of SARs. In April 2002, Congress passed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act). The USA Patriot Act amended provisions of the Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act) and substantially expanded a broker-dealer’s obligations to detect and prevent money laundering. Effective Dec. 31, 2002, broker-dealers are responsible to report suspicious transactions by filing a SAR reporting any transaction (or a pattern of transactions of which the transaction is a part) involving or aggregating at least $5,000 that it “knows, suspects, or has reason to suspect:” involves funds derived from illegal activity or is conducted to disguise funds derived from illegal activities; is designed to evade any requirements of the Bank Secrecy Act; has no business or apparent lawful purpose and the broker-dealer knows of no reasonable explanation for the transaction after examining the available facts; or involves use of the broker-dealer to facilitate criminal activity. The failure to file a SAR is a violation of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder. Background of Park Case In the Park case, the SEC has chosen an egregious set of facts to trot out its new basis of liability. Park ignored numerous warning signs about the trading in Spear & Jackson stock. The situation began when a Florida based stock promoter working for Spear & Jackson referred three British Virgin Island companies to Park. Park never met any of the principals of the BVI companies; it received all account opening information by mail and all trading instructions by phone. The BVI companies traded exclusively, nearly daily, and in high volumes, in Spear & Jackson stock. Park accepted orders to sell the BVI companies’ shares of Spear & Jackson from Crowley, even though Crowley had no legal relationship to the BVI companies, was not authorized to transact shares on behalf of those companies, and despite the fact that Park knew that Crowley was Spear & Jackson’s CEO. The BVI companies, moreover, transferred a large number of Spear & Jackson stock to the stock promoter. All in all, Park handled more than 200 transactions for the BVI companies, selling an aggregate total of over one million shares and collecting about $2.5 million in proceeds for the BVI companies. Spear & Jackson’s price soared from $2 per share to $16 per share during the nearly 18 months while this pump and dump scheme was underway. In April 2004, the SEC filed charges against Crowley, Spear & Jackson and the stock promoter. Crowley was ordered to pay $6 million and was barred from being a director or officer of a public company. The stock promoter was ordered to disgorge over $2 million, and its two principals were each ordered to pay disgorgement and penalties in excess of $420,000. Now, three years later, the SEC has filed charges against Park and Cantley. Pursuant to those charges, a hearing will be scheduled before an administrative law judge to determine whether the allegations are true and to determine remedial actions. Implications of the Case Until now, the SEC’s enforcement of the USA Patriot Act against broker-dealers focused on their failure either to adopt appropriate anti-money laundering programs or to follow such programs. For example, last year, the SEC brought an enforcement action against a Los Angeles-based broker-dealer for failing to follow internal policies concerning verifying the identities of new customers. That broker-dealer’s policy required it to check government issued identification before opening new accounts. The broker-dealer nevertheless opened more than 2,900 accounts in a six-month period without following this policy, instead relying on the word of its registered representatives. The SEC charged the broker-dealer with violating the USA Patriot Act, but did not impose a fine. In an earlier case, the SEC and the New York Stock Exchange imposed a $2.8 million fine on a broker-dealer that failed to establish an adequate anti-money laundering program. The Park case represents a new area of enforcement for the SEC. The SEC will undoubtedly increase its SARs enforcement on broker-dealers. In fact, on April 16, the SEC announced the availability of “a new compliance tool to assist anti-money laundering compliance efforts by broker-dealers.” The compliance tool – a compendium of information concerning a broker-dealer’s anti-money laundering obligations – is available at http://www.sec.gov/about/offices/ocie/amlsourcetool.htm. Statistics suggest that broker-dealers are not currently doing an adequate job reporting suspicious activities. For example, in 2005, securities industry participants filed a total of less than 7,000 SARs, as compared to more than 900,000 SARs filed by depository institutions and money services businesses (and as compared to 16 million currency transaction reports filed concerning reportable cash transactions.) In the face of this enforcement initiative, broker-dealers should do three things to avoid liability. First, they must ensure that their SAR policy is appropriate, in force and followed. Second, they should review SARs that they have filed to make sure that they are properly reporting suspicious transactions. Finally, they should be alert to the public record for criminal, civil or administrative actions (including private litigation) brought against their clients to determine whether they failed to report trading that should have been reported. If a broker-dealer has not filed any SARs (or few SARs relative to its trading volumes), then the broker-dealer must assume that its SAR policy is failing and address and correct that failure. DAVID M. LAIGAIE , a partner at Dilworth Paxson, heads the corporate investigations and white collar group. His areas of practice include health care fraud, securities fraud, tax fraud, export violations, pharmaceutical marketing fraud, municipal corruption, defense procurement fraud and public finance fraud. He regularly conducts internal corporate investigations. RICHARD S. KRAUT , a partner in Dilworth Paxson’s Washington office, is a member of Dilworth Paxson’s corporate investigations and white collar group. Kraut previously served as an assistant director of the SEC’s division of enforcement. Kraut represents clients before the SEC, defends against SEC enforcement actions and private securities cases, conducts internal corporate investigations and represents individuals and companies in criminal investigations.

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