On July 30th, FINRA expelled broker-dealer Biremis Corporation and permanently barred Biremis’s CEO, Peter Beck, from association with any FINRA member firm in any capacity. FINRA found Biremis and Beck liable for a host of violations. FINRA alleged that among other things, Biremis failed to implement an adequate anti-money laundering (“AML”) program, failed to maintain necessary net capital reserves, failed to maintain required e-mails for a six-year period, and failed to establish written supervisory procedures reasonably designed to comply with the applicable regulations prohibiting manipulative trading activity. As Biremis’s president and CEO, Beck was responsible for ensuring that Biremis was in compliance with securities laws, regulations, and SRO rules. He allegedly didn’t do that, so he had to fall as well.
I am mostly interested in Biremis’s AML issues. But to understand them, you have to understand Biremis’s business model, which was unusual to say the least.
Biremis’s Business Model
Biremis did not have customers the way most broker-dealers have customers. Instead, the firm received its order flow exclusively from two customers, Opal Stone Financial Services (a Uruguayan corporation) and Swift Trade Inc. (an Ontario corporation). Both were owned by Biremis-related entities, and each one’s sole business was to route orders received from day-trading customers to Biremis. Opal Stone’s and Swift Trade’s customers were corporations and individuals who had opened trading offices to engage in day trading in securities markets in the United States and elsewhere. Those trading offices, in turn, engaged individual day traders to trade securities in those offices’ accounts.
Opal Stone and Swift Trade each maintained an omnibus account at Biremis. In 2009 and 2010, just over 180 trading offices employed roughly 3,700 traders who routed their orders to Biremis through Opal Stone or Swift Trade. In the same period, Biremis received approximately 1.25 million orders every day, representing about 234 million shares traded for each day.
FINRA found that Biremis failed to implement an adequate AML program to detect and report transactions required under 31 U.S.C. § 5318(g) and to achieve compliance with the Bank Secrecy Act. Among other things, the firm allegedly did not:
- have qualified individuals implementing its AML program;
- file suspicious activity reports (“SARs”) when appropriate;
- provide adequate AML training to employees; or
- adequately document its 2009 AML independent test.
More specifically, Biremis appointed an unqualified and inexperienced AML compliance officer for four years starting in 2005. This person failed to conduct any meaningful AML-related review of trading activity. The firm also identified certain instances of potentially collusive and manipulative trading activity, but did not even consider whether SARs should be filed to report the activity. Because Biremis’s “independent” AML test in 2009 was conducted by the firm’s general counsel, did not identify any methods used for testing, and did not highlight any results of the AML audit, the test was inadequate for purposes of complying with then-NASD rule 3011(c). Also, Biremis could not identify the identities of many of its traders through the firm’s proprietary trading platform because some of them used multiple trader identification codes (“Trader IDs”). As of November 1, 2010, Biremis had roughly 3,700 traders, but over 26,000 active Trader IDs. Without knowing the identities of the individuals trading, Biremis could not properly detect and report manipulative trading and other suspicious activity.
Based on this conduct and other items, FINRA found that Biremis violated NASD Rules 2110 and 3011(a), (b), (c), and (e), and FINRA Rules 2010 and 3310(a) and (b).
Where is the SEC?
One question that occurred to me as I read Biremis’s settlement papers was: where is the SEC on this? It seems quite likely that the AML deficiencies listed would violate Exchange Act Rule 17a-8, which requires broker-dealers to maintain records adequate to ensure compliance with the Bank Secrecy Act. Failures to file SARs would be easy candidates for violations under Rule 17a-8, as the SEC has demonstrated here, here, and here. But broker-dealers are also required to identify who their customers are, under 31 C.F.R. § 103.122(b)(2). Who are a broker-dealer’s “customers,” anyway? That can be a very tricky question. A customer is a “person that opens a new account.” 31 C.F.R. § 103.122(a)(4)(i)(A). And an account “means a formal relationship with a broker-dealer established to effect transactions in securities.” 31 C.F.R. § 103.122(a)(1)(i). One would have to know more facts about any communications between the individual traders and Biremis itself to be sure. But if Opal Stone and Swift Trade, as well as the intermediate trading offices, were seen to be mere instruments of Biremis, it seems possible to me that the individual day traders could be construed as the firm’s actual customers. The SEC has taken a position like this before.
All of which is to say that regulators may not be through with Biremis Corporation, or Peter Beck.