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United States Securities and Exchange Commission v. Alpine Securities Corp.

United States District Court, S.D. New York

March 30, 2018

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
ALPINE SECURITIES CORPORATION, Defendant.

          For plaintiff United States Securities and Exchange Commission: Zachary T. Carlyle Terry R. Miller U.S. Securities and Exchange Commission

          For defendant Alpine Securities Corporation: Maranda E. Fritz Thompson Hine LLP Brent R. Baker Aaron D. Lebenta Jonathan D. Bletzacker Clyde Snow & Sessions One Utah Center

          OPINION & ORDER

          DENISE COTE, District Judge

         This litigation addresses the duty of a broker-dealer to file suspicious activity reports (“SARs”). The Securities and Exchange Commission (“SEC”) alleges that Alpine Securities Corporation (“Alpine”) has violated 17 C.F.R. § 240.17a-8 (“Rule 17a-8”), promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), by filing fatally deficient SARs or by failing to file any SAR when it had a duty to do so. Rule 17a-8 requires compliance with Bank Secrecy Act (“BSA”) regulations that, inter alia, govern the filing of SARs by broker-dealers.

         Because the SEC alleges several thousand violations of Rule 17a-8, the Court invited the parties to move for partial summary judgment using exemplar SARs. The SEC has done so, submitting several SARs in each of four categories that it alleges reveal violations of Rule 17a-8. Alpine has submitted its own motion for summary judgment and for judgment on the pleadings, principally arguing that the SEC is without authority to enforce BSA regulations. For the reasons that follow, the SEC's motion is granted in part and Alpine's motion is denied.

         Background

         The following facts are taken from the parties' evidentiary submissions. In the sections of this Opinion addressing each party's summary judgment motion, inferences are drawn in favor of the nonmovant. Insofar as this Opinion addresses Alpine's motion for judgment on the pleadings, solely the operative pleadings are considered.

         I. Alpine's Business

         Alpine is a broker-dealer that primarily provides clearing services for microcap securities traded in the over-the-counter market.[1] As a clearing broker, Alpine's role is principally to prepare trade confirmations, receive and deliver customers' funds, maintain books and records, and maintain custody of customer funds and securities. An introducing broker, in contrast, is responsible for opening customer accounts, directly interacting with customers, and executing trades. An introducing broker transmits transaction information to a clearing broker, which then completes the transaction.

         For all of the SARs submitted by the SEC in support of its motion for partial summary judgment, Alpine acted as the clearing broker. For a majority of the transactions at issue in this suit, and all but one of the transactions at issue in the SEC's motion, the introducing broker was Scottsdale Capital Advisors (“SCA”). SCA and Alpine are owned by the same individual.

         Alpine has an anti-money laundering (“AML”) program consisting of written standard procedures (“WSPs”). Alpine represents that it updates its WSPs to account for guidance provided by the Financial Crimes Enforcement Network (“FinCEN”)[2] and other regulators; the parties have submitted excerpts from WSPs dated January 2012, April 2013, August 2014, and October 2015.

         Alpine's WSPs relating to the filing of SARs incorporate regulatory language from 31 C.F.R. § 1023.320 (“Section 1023.320”), the principal regulation at issue in this case, which requires broker-dealers such as Alpine to file SARs in certain circumstances. The WSPs also incorporate relevant language from guidance documents published by FinCEN regarding “red flags” that a broker-dealer should investigate if they appear in a transaction subject to the SAR regulation. See Alpine Apr. 11, 2013 WSPs at 152. These include the following:

The customer (or a person publicly associated with the customer) has a questionable background or is the subject of news reports indicating possible criminal, civil, or regulatory violations.
. . .
The customer engages in suspicious activity involving the practice of depositing penny stocks, liquidates them, and wires proceeds. A request to liquidate shares may also represent engaging in an unregistered distribution of penny stocks which may also be a red flag.
. . .
The customer, for no apparent reason or in conjunction with other “red flags, ” engages in transactions involving certain types of securities, such as penny stocks . . . .

         Alpine Jan. 5, 2012 WSPs at 40-41.[3] This list is consistent across the WSPs. In addition, the 2014 WSPs give as an example of “transactions that may be indicative of money laundering” those involving “heavy trading in low-priced securities” and “unusually large deposits of funds or securities.” Alpine Aug. 29, 2014 WSPs at 180.

         Alpine's AML Officer describes its AML procedures as follows. For each transaction cleared by Alpine, Alpine receives from the introducing broker a “due diligence packet” containing information about the customer and transaction. The due diligence packet is transmitted to an Alpine compliance analyst, who reviews the transaction based on “various predetermined areas of focus” set by Alpine's AML managers. In addition, Alpine created and maintained a “heightened supervision list, ” which Alpine claims to have created

as an aid to Alpine employees conducting AML review, and to ensure Alpine's own enhanced scrutiny of transactions. The reasons for inclusion on the list vary and inclusion on the list, or reference to the list, did not constitute any finding by Alpine that there was anything criminally suspicious about the transaction itself. In filing SARs on this basis, and highlighting the list in the SAR narrative, Alpine was providing what it understood to be useful information to regulators, even though a SAR filing was not required.

         Alpine contends that many of the SARs it filed “did not meet the requirements for when a SAR must be filed” under Section 1023.320, and were merely “voluntary SARs.” After an Alpine compliance analyst drafted a SAR, the draft SAR would be sent to Alpine's AML Officer, Chief Compliance Officer, and/or a legal analyst for review. The review process could include “additional review of the due diligence packet . . ., additional research on Google of the parties involved, research of any stock promotions, and review of trading volume, including discussions with the trading desk if necessary.”

         The SEC's principal allegation in its complaint is that Alpine's AML program and WSPs “did not accurately represent what Alpine did in practice, ” and that in reality, Alpine's AML program failed to comply with Section 1023.320, and that Alpine thereby violated Rule 17a-8. The complaint divides this general allegation into four categories of failures. The SEC alleges that Alpine has (1) failed to include pertinent information in approximately 1, 950 SARs, (2) failed to file additional or continuing SARs for certain suspicious patterns of transactions in approximately 1, 900 instances, (3) filed at least 250 SARs after the 30-day period for filing had elapsed, and (4) failed to maintain supporting information for approximately 1, 000 SARs as it is required to do for five years after filing.

         II. The Exemplar SARs

         The SEC moves for summary judgment on 36 SARs, on a No. of different grounds. For the purposes of this motion, the SEC first contends that Alpine filed 14 SARs with deficient narratives. The SEC has labeled these SARs A through H, J through N, and P. A brief summary of each of the 14 SARs follows.[4]

         SAR A was filed April 24, 2012. The SAR A narrative states that the customer “is a client of [SCA], a firm for which Alpine Securities provides clearing services. On or around [date, this customer] deposited a large quantity (4 ___, ___, ___ shares) of [issuer], a low-priced ($0.11/share) security. This transaction amounted to approximately $4, ___, ___.___.” The SEC alleges that SAR A insufficiently conveys why the transaction was suspicious, is deficient because it fails to note the involvement of a shell company, and improperly fails to disclose that a foreign entity participated in the transaction; these last two pieces of information are contained in the SAR A support file.

         SAR B was filed on April 28, 2012. The narrative portion of the SAR states that the customer

is a client of [SCA], a firm for which Alpine Securities provides securities clearing services. On or around [date, this customer] made a DWAC deposit representing a large quantity (5, ___, ___ shares) of [issuer], a low-priced ($.0176/share) security into brokerage account [number]. The brokerage account is maintained through Alpine Securities. Alpine is also filing a SAR due to the heightened sensitivity surrounding this client. This proposed transaction is expected to amount to approximately $8 ___, ___.___. [This customer] acquired the shares as a partial settlement of $3, ___, ___.___ owed to them by the issuer. Alpine is filing a SAR due to the heightened sensitivity surrounding the client.

         No SAR B support file was submitted. The SEC alleges that the SAR B narrative is deficient because it does not disclose why Alpine thought the transaction was suspicious.

         SAR C was filed July 6, 2011. The narrative portion states as follows: The customer

is a client of [SCA], a firm for which Alpine Securities provides securities clearing services. Due to the activity within this account, it has been placed on a Heightened Supervisory list. It is policy of Alpine to file a SARs [sic] related to each deposit of securities into it's [sic] account. On or around [date, this customer] deposited a large quantity (5, ___, ___ shares) of [issuer], a low-priced ($0.019/share) security. This transaction amounted to approximately $1___, ___.___.

         The SAR C support file contains information indicating that a shell company was involved with the transaction, as well as a foreign entity; the SEC alleges that the narrative was deficient because it failed to disclose that information or why Alpine found the transaction suspicious.

         SAR D was filed on January 13, 2012. The narrative states in relevant part that

[d]ue to the activity within this account, it has been placed on a Heightened Supervisory list. It is policy of Alpine to file a SARs [sic] related to each deposit of securities into accounts of this nature. On or around [date, this customer] deposited a large quantity (2, ___, ___) of [issuer], a low-priced ($.0062/share) security. This transaction amounted to approximately $1___, ___.___.

         The SEC alleges that this SAR was deficient because it failed to include information contained in the SAR support file that the customer and its CEO were engaged in litigation with the SEC.

         SAR E was filed on August 21, 2012. The narrative reads in relevant part that

[o]n or about [date, this customer] deposited a large quantity (2___, ___, ___ shares) of [issuer], a low-priced ($0.0096/share) security. This transaction amounted to approximately $2___, ___.___. Alpine Securities is filing a suspicious activity report because this deposit involves a large volume of shares of a low-priced security and also has a high estimated value.

         The SAR E support file contains search results indicating that the customer had previously pleaded guilty to conspiracy relating to counterfeiting, and the SEC contends that SAR E was deficient because it failed to disclose that information.

         SAR F was filed on May 5, 2014. The narrative states as follows:

[Customer] is a client of [SCA], a firm for which Alpine Securities provides securities clearing services. On or around [date, this customer] deposited a physical stock certificate(s) representing a large quantity (1___, ___, ___ shares) of [issuer], a low-priced ($.0033/share) security into brokerage account [number]. The brokerage account is maintained through Alpine Securities. Alpine is filing this SAR because of the potentially suspicious nature of depositing large volumes of shares involving a low-priced security(ies). This proposed transaction is expected to amount to approximately $4___, ___.___. . . . [This customer] purchased a convertible note for $1___, ___.___ pursuant to an [agreement] on [date]. [This customer] converted $1, ___.___ dollars into 1- million shares. Alpine is also filing a SAR as, shortly thereafter, the shares are worth about 33 times their purchase price, which may be potentially suspicious.

         The SAR F support file includes information indicating that the customer had a history of being investigated by the SEC for misrepresentations, and the SEC alleges that Alpine was required to include this information.

         SAR G was filed on March 8, 2013. The narrative states

[Customer] is a client of [SCA], a firm for which Alpine Securities provides securities clearing services. It is Alpine's policy to file a SAR for each security deposited into the account because of the heightened sensitivity around this particular account as this account historically makes deposits of large volumes of low-priced securities. For that reason this transaction may be suspicious in nature. On or around [date, this customer] deposited a physical stock certificate(s) representing a large quantity (6, ___, ___ shares) of [issuer], a low-priced ($0.0062/share) security, into brokerage account [number]. The brokerage account is maintained through Alpine Securities. This transaction amounted to approximately $4___, ___.___.

         The SAR G support file contains information indicating that no company website was found for the issuer, that the issuer was not current in its SEC filings, that the over-the-counter markets placed a stop signal on the issuer's stock, and that there was a history of stock promotion. The SEC alleges that this SAR is deficient because Alpine did not include this information.

         SAR H was filed on August 26, 2013. The narrative states that the customer

is a client of [SCA], a firm for which Alpine Securities provides securities clearing services. It is Alpine's policy to file a SAR for each security deposited into the account because of the heightened sensitivity around this particular account as this account historically makes deposits of large volumes of low-priced securities. For that reason this transaction may be suspicious in nature. On or around [date, the customer] deposited a physical stock certificate(s) representing a large quantity (1___, ___, ___ shares) of [issuer], a low-priced ($0.0006/share) security, into brokerage account [number]. The brokerage account is maintained through Alpine Securities. This transaction amounted to approximately $7, ___.___.

         The SEC alleges that SAR H is deficient because it fails to disclose a history of stock promotion by the issuer and that a foreign entity was involved in the transaction, both pieces of information contained in the SAR H support file.

         SAR J was filed on July 16, 2012. The SAR narrative states that the customer is a client of SCA, and that

[d]ue to the activity within this account, it has been placed on a Heightened Supervisory list. It is policy of Alpine to file a SARs [sic] related to each deposit of securities into accounts of this nature. On or around [date, this customer] deposited a large quantity (6___, ___, ___ shares) of [issuer], a low-priced ($.0002/share) security. This transaction amounted to approximately $1___, ___.___.

         The SEC alleges that SAR J was deficient because the narrative does not disclose that the stock had been promoted, information contained in the SAR J support file.

         SAR K was filed on May 6, 2013. The narrative states that the customer in question is a client of SCA, and that Alpine files

a SAR for each security deposited into the account because of the heightened sensitivity around this particular account as this account historically makes deposits of large volumes of low-priced securities. For that reason this transaction may be suspicious in nature. On or around [date, this customer] deposited a physical stock certificate(s) representing a large quantity (1___, ___, ___ shares) of [issuer], a low-priced ($0.001/share) security, into brokerage account [number]. The brokerage account is maintained through Alpine Securities. This transaction amounted to approximately $1___, ___.___.

         The SEC alleges that SAR K is deficient because it does not report that the issuer's website is not currently functioning, information contained in the SAR K support file.

         SAR L was filed on June 7, 2013. The narrative recites that the customer is a client of SCA, and that it is

Alpine's policy to file a SAR for each security deposited into the account because of the heightened sensitivity around this particular account as this account historically makes deposits of large volumes of low-priced securities. For that reason this transaction may be suspicious in nature. On or around [date, the customer] deposited a physical stock certificate(s) representing a large quantity (2, ___, ___ shares) of [issuer], a low-priced ($0.003/share) security, into brokerage account [number]. The brokerage account is maintained through Alpine Securities. This transaction amounted to approximately $8, ___.___.

         The SEC alleges that SAR L is deficient because it does not report that the issuer's corporate registration was in default, information contained in the SAR L support file.

         SAR M was filed on April 17, 2013. The SAR M narrative reports that the customer is client of SCA and that

[i]t is Alpine's policy to file a SAR for each security deposited in to the account because of the heightened sensitivity around this particular account as this account historically makes deposits of large volumes of low-priced securities. For that reason this transaction may be suspicious in nature. On or around [date, this customer] deposited a physical stock certificate(s) representing a large quantity (5, ___, ___ shares) of [issuer], a low-priced ($0.0159/share) security, into brokerage account [number]. The brokerage account is maintained through Alpine Securities. This transaction amounted to approximately $1___, ___.___. [This customer] acquired the shares from a promissory note dated [date] in the principal amount of $1___, ___.___ issued to [the customer]. The note is specifically disclosed in 10Q filed [date] period ending [date]. [This customer] converted the entire note into 5, ___, ___ shares pursuant to the notice of conversion dated [date].

         The SEC alleges that because the SAR M narrative does not report that the average shares traded per day over the last three months for the security was 59, 108, roughly one hundred times smaller than the single deposit reported in SAR M, SAR M is deficient.

         SAR N was filed on June 6, 2013. The SAR narrative states that the customer is a client of SCA, and that on a given date, the customer

deposited a physical stock certificate(s) representing a large quantity (6___, ___, ___ shares) of [issuer], a low-priced ($0.0055/share) security into brokerage account [number]. The brokerage account is maintained through Alpine Securities. The entity is a foreign broker-dealer. Alpine is filing this SAR because of the potentially suspicious nature of depositing large volumes of shares involving a low-priced security(ies). This transaction amounted to approximately $3-___, ___.___. [This customer] deposited the shares for the benefit of [the customer's] sub-account [name] who is a resident of Panama.

         The SEC alleges that SAR N is deficient because it fails to report that the security at issue had a trading volume of around 100, 000 shares per day, more than 600 times smaller than the single deposit reported in the SAR, information contained in the support file.

         SAR P was filed on March 6, 2014. The SAR P narrative states that the customer is a client of SCA, and that on a given date the customer

deposited a physical stock certificate(s) representing a large quantity (5___, ___ shares) of [issuer], a low-priced ($.55/share) security into brokerage account [number]. The brokerage account is maintained through Alpine Securities. Alpine is filing this SAR because of the potentially suspicious nature of depositing large volumes of shares involving a low-priced security(ies). This proposed transaction is expected to amount to approximately $2-___, ___.___. The shares stem from debt owed to [the customer] from the issuer. [This customer] converted a $2___, ___.___ portion of the debt into the 5___, ___ shares. Alpine is also filing a SAR as the shares represent a potential large return on the investment, which may be suspicious.

         The SEC alleges that SAR P is deficient because it fails to report that the average trading volume is 10, 971, roughly fifty times smaller than the deposit reported in the SAR, information found in the support file.

         The SEC also moves for summary judgment on the ground that Alpine failed to file necessary SARs for three of its customers who engaged in patterns of deposit-and-liquidation transactions that are suspicious as a matter of law; the SEC refers to these customers as Customers A, B, and C. The SEC has submitted the SARs that Alpine did file as Customer A SARs 1 through 5, Customer B SARs 1 through 5, and Customer C SARs 1 and 2. Each of these SARs notes that the customer has deposited a large No. of certificates of a penny stock. The SEC has also submitted charts that it alleges represent subsequent sales of shares in that same penny stock. The SEC alleges that the pattern of a large deposit of securities followed by successive sales of a large proportion of that deposit required Alpine to file SARs reporting those sales.

         The SEC further moves for summary judgment on five SARs it alleges were filed late; these SARs are labeled Late SARs 1 through 5. Each of these five SARs was filed between 189 and 211 days after the underlying transaction.

         Lastly, the SEC moves for summary judgment on five SARs for which it alleges Alpine has not maintained support files for five years, as it is required to do. These SARs are labeled Missing File SARs 1 through 5. The SEC has submitted the SARs and alleges that Alpine did not produce any support files for those SARs when requested to do so by the SEC in 2016.

         Procedural History

         The SEC filed this action on June 5, 2017. On August 3, Alpine moved to dismiss under Rules 12(b)(2) and 12(b)(3) for lack of personal jurisdiction and improper venue, or to transfer venue to the District of Utah under 28 U.S.C. § 1404(a). The August 3 motion to dismiss or to transfer was denied at a conference on September 15.

         Alpine answered the complaint on September 29, 2017, and filed an amended answer on October 27. On November 13, the SEC filed a motion to strike affirmative defenses of estoppel, waiver, and unclean hands asserted in Alpine's amended answer. The November 13 motion to strike was granted January 12, 2018.

         A Scheduling Order of September 15, 2017 set the discovery schedule, which is ongoing. Fact discovery was scheduled to conclude on March 30, 2018. Expert reports and disclosures of expert testimony were due to be served by April 20, and identification of rebuttal experts and disclosure of their expert testimony to be served by May 11. Any motion for summary judgment, or a joint pretrial order, is due July 13, 2018.[5]

         As invited by the Court, the SEC moved for partial summary judgment on December 6, 2017. In connection with its motion, and pursuant to an Order of December 13, the SEC submitted 36 SARs under seal as examples of the four categories of Rule 17a-8 violations it asserts. The SEC's motion became fully submitted on February 9, 2018. Alpine moved for summary judgment and for judgment on the pleadings on January 19. Alpine's motion became fully submitted on February 26.

         Discussion

         The parties have cross-moved for summary judgment. “On a motion for summary judgment, the court must resolve all ambiguities and draw all permissible factual inferences in favor of the party against whom summary judgment is sought.” Dufort v. City of New York, 874 F.3d 338, 347 (2d Cir. 2017) (citation omitted). “For the court to grant summary judgment, the movant must show that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Nick's Garage, Inc. v. Progressive Cas. Ins. Co., 875 F.3d 107, 113 (2d Cir. 2017) (citation omitted).

         In assessing a motion for judgment on the pleadings under Rule 12(c), Fed. R. Civ. P., the court “accept[s] all factual allegations in the complaint as true and construe[s] them in the light most favorable to the non-moving party.” Latner v. Mt. Sinai Health Sys., Inc., 879 F.3d 52, 54 (2d Cir. 2018). This is the “same standard as that applicable to a motion under Rule 12(b)(6).” Mantena v. Johnson, 809 F.3d 721, 727 (2d Cir. 2015) (citation omitted).

         An agency to which Congress has delegated authority to administer a statute is entitled to judicial deference to its views of the statute it administers. If an agency promulgates a regulation and complies with the notice-and-comment procedures defined in the Administrative Procedure Act (“APA”), 5 U.S.C. § 500, et seq., a court reviews the regulation under the two-part framework established in Chevron U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). Formal adjudications by an agency are also binding on a court if the agency view passes Chevron review. See, e.g., ABF Freight Sys., Inc. v. NLRB, 510 U.S. 317, 324 (1994). Giving an agency the power to regulate via adjudication as well as via rulemaking implies the power to govern conduct prospectively, via rules and retrospectively, in the form of adjudications. See SEC v. Chenery Corp., 332 U.S. 194, 201-02 (1947); see also Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 221 (1988) (Scalia, J., concurring) (defining adjudication as “that form of administrative action where retroactivity is not only permissible but standard”).

         “Step One of Chevron analysis requires the court to determine whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Lawrence Memorial Hosp. v. Burwell, 812 F.3d 257, 264 (2d Cir. 2016) (citation omitted). If the statute is ambiguous or silent on the question, however, “[t]he question for the reviewing court . . . is whether the agency's answer to the interpretive question is based on a permissible construction of the statute.” Catskill Mountains Chapter of Trout Unlimited, Inc. v. EPA, 846 F.3d 492, 520 (2d Cir. 2017) (citation omitted). “The agency's view need not be the only possible interpretation, nor even the interpretation deemed most reasonable by the courts, ” so long as the interpretation is “reasonable” and not “not arbitrary, capricious, or manifestly contrary to the statute.” Id. (emphasis in original) (citation omitted).

         Similarly, a court must defer to an agency's “interpretation of its own regulations unless that interpretation is plainly erroneous or inconsistent with the regulation.” Nat. Res. Def. Council v. EPA, 808 F.3d 556, 569 (2d Cir. 2015) (citation omitted). This is true even if the agency's interpretation of its regulation was not promulgated through formal procedures prescribed by the APA, but, for example, is advanced in a legal brief. See Talk Am., Inc. v. Mich. Bell Tel. Co., 564 U.S. 50, 59 (2011). This kind of deference is referred to as “Auer deference” after Auer v. Robbins, 519 U.S. 452 (1997), but it is “warranted only when the language of the regulation is ambiguous.” Christensen v. Harris Cty., 529 U.S. 576, 588 (2000). If a regulation is unambiguous, the clear meaning of the regulation controls and may not be overridden by an inconsistent agency interpretation. See id.

         An agency may announce an interpretation of a statute it administers in a variety of ways that do not receive Chevron deference but that nonetheless receive “a respect proportional to [their] power to persuade.” United States v. Mead Corp.,533 U.S. 218, 235 (2001) (quoting Skidmore v. Swift & Co.,323 U.S. 134, 140 (1944)). This level of deference is referred to as Skidmore deference. A less formal agency interpretation of this nature is often referred to as “guidance, ” although whether it is entitled to Auer deference or merely Skidmore deference depends both on the ambiguity of the agency regulation and on whether the guidance is interpreting the statute, in which case it is merely persuasive, or the regulation, in which case Auer deference may be appropriate. See, e.g., Alaska Dep't of Envtl. Conservation v. EPA,540 U.S. 461, 487-88 (2004); Christensen, 529 U.S. at 588. The weight given to a guidance document of this sort “in turn depends on, inter alia, the thoroughness evident in its consideration, the validity of its reasoning, and its consistency with earlier and later ...


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