Network 1 Financial Securities

Network 1 Financial Securities was censured and fined $60,000 for failing to develop and implement an AML program reasonably designed to address potential insider trading by firm customers as well as the review of microcap securities trading.

The firm knew that certain of its customers were insiders of the securities in which they were trading but its systems did not identify those customers’ transactions for AML review.

As a result, the firm failed to identify that a customer, a self-identified corporate insider of a microcap issuer, was actively trading the stock of his own company and the firm failed to conduct any investigation or cause the reporting of that potentially suspicious activity.

The customer’s trading in microcap securities exhibited many of the red flags of money laundering or other illegal activities that were identified in the firm’s procedures including the deposit and liquidation of shares of microcap securities, followed by the wiring out of proceeds, trading during price and volume spikes, and trading by a known stock promoter.

The accounts also appeared on exception reports provided to the firm by its clearing firm to detect potentially suspicious microcap securities trading.

However, contrary to its AML procedures, the firm failed to timely review those exception reports and its daily deposit and withdrawal activity reports and as a result, failed to detect or investigate these red flags.