Colorado Financial Service Corporation

Colorado Financial Service Corporation was fined $50,000 for findings that its AML procedures were not reasonably designed to detect and report suspicious transactions, including potentially manipulative activity such as prearranged trading. The findings stated that although the firm’s AML procedures stated that the firm would manually monitor a sufficient amount of account activity to permit identification of patterns of unusual size, volume, pattern or type of transactions, the procedures did not identify the frequency of such monitoring, what constituted a “sufficient amount” of activity to review, or what activity the firm considered to be suspicious or unusual.

 The AML procedures also stated that the firm would use exception reports that included transaction size, location, type, number, and nature of the activity. But the procedures did not identify any specific reports or monitoring parameters, and, in practice, the firm did not use any exception report designed to monitor for suspicious activity. Instead, the firm relied exclusively on a daily manual review of its trade blotter to monitor for suspicious trading activity. The blotter, however, did not contain sufficient information to allow a reviewer to identify suspicious transactions, including order entry time, market trading volume, patterns of trading across accounts or multiple days, or potentially prearranged trading between accounts.

 Furthermore, the firm failed to detect or investigate red flags of suspicious trading in a low-priced, thinly traded security. For example, the firm failed to detect multiple instances where two customers executed corresponding buy and sell orders in a security in equal share amounts at the same price, and one instance where the same two customers placed corresponding buy and sell orders for shares of the security at an identical price within two minutes of one another.

The firm also failed to detect instances where trading activity by the same two customers accounted for up to 85 percent of the total daily market trading volume in the security.

Moreover, even when the firm’s clearing firm raised concerns about the same two customers’ trading activity in the security, the firm failed to take any reasonable steps to investigate.