FINRA Sanctions CCO/AMLCO Over Microcap Red Flags And Private Placement Disclosures

From April 2016, through March 2018, in his capacity as Fusion's AMLCO, Restrepo failed to reasonably establish and implement (i) an anti-money laundering (AML) compliance program reasonably designed to detect and cause the reporting of suspicious activity and (ii) a reasonably designed Customer Identification Program (CIP). As a result, Restrepo violated FINRA Rules 3310(a) and (b) and 2010. For calendar year 2016, Restrepo also failed to ensure that the firm conducted an annual independent test of its AML program. As a result, Restrepo violated FINRA Rules 3310(c) and 2010. 

During the period April 2016, through March 2018, Restrepo also failed to reasonably establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with Section 5 of the Securities Act of 1933. As a result, Restrepo violated FINRA Rules 3110(a) and (b) and 2010. 

Restrepo was the principal responsible for supervising private placements and reviewing correspondence. During the period of January 2017, until June 2018, Restrepo failed to reasonably supervise two private placements sold by Fusion in which Fusion failed to conduct and document reasonable investigations of the offerings and their issuers before recommending those securities to its customers. In addition, in connection with one of the private placements, Registered Representatives I and 2, who were associated with Fusion, employed, used, and made materially misleading statements in the sale of private placements. These registered representatives also relied on and distributed sales materials that were not balanced and that failed to disclose the risks associated with the investments. Restrepo was aware of multiple red flags of potential misrepresentations in offering materials distributed by Representatives I and 2 but did not reasonably investigate those red flags or otherwise take meaningful action to stop the misconduct. By reason of the foregoing, Restrepo violated FINRA Rules 3110(a) and (b) and 2010.  

[F]usion's customers deposited and liquidated approximately 31 million shares of microcap securities, resulting in net proceeds of approximately $20 million. Liquidations of microcap securities represented approximately 88% of all securities liquidations at the firm, and sales of microcap securities represented approximately 26% of all sales proceeds at the firm during that time.

(a) Establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under 31 U.S.C. 5318(g) and the implementing regulations thereunder;

(b) Establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act and the implementing regulations thereunder; . . .

[R]estrepo failed to reasonably tailor Fusion's AML procedures to this business and failed to reasonably detect and investigate known red flags of suspicious activity associated with those transactions. Restrepo also failed to establish and implement a reasonably designed CIP tailored to the firm's microcap stock business and its customer base. 

Restrepo's failure caused the firm to fail to detect and report potentially suspicious trading activity. For example, during the relevant period, one broker team opened accounts for approximately eight foreign individuals who deposited blocks of stock of the same issuer, which they received as "gifts." Many of the customers then liquidated the shares and immediately transferred out the sales proceeds. Restrepo did not identify the deposits and liquidations as red flags and took no steps to determine whether the accounts should be identified as "higher risk."

Under the firm's WSPs, when a customer sought to resell a block of a little-known security or deposit unregistered securities or large blocks of microcap stocks, the registered representative was required to make inquiries to determine whether the resale may be illegal and get a completed Deposit Securities/Resale Request Questionnaire (DSRQ) from the customer. The broker on the account and Restrepo, the designated principal, were tasked with reviewing the DSRQ and raising any concerns or suspicions o the CCO and AMLCO (Restrepo). Without any system to verify the accuracy of the materials customers provided to the firm, Restrepo relied solely on the brokers to review DSRQs and the supporting materials their customers submitted. Restrepo failed to implement any reasonable system to verify whether securities being deposited were restricted or free trading. As a result, Restrepo failed to identify certain errors and red flags, which would have been apparent upon a reasonable review of the documentation on its face.

Prior to Restrepo's association with Fusion, Fusion and Registered Representative l sold equity in a company (OldCo) run by Promoter I and founded by his family. OldCo claimed to have developed a revolutionary new engine that was cleaner and more efficient than traditional internal combustion engines. Between 2004 and 2011, OldCo raised more than $80 million through the sale of equity in unregistered offerings. 

The SEC filed an Order Instituting Cease-and-Desist Proceedings (SEC Order) in 2013, imposing sanctions on OldCo and Promoter I. The SEC found that the unregistered offerings failed to qualify for registration exemptions and that Promoter I caused OldCo to engage in a plan to evade registration requirements by concealing the number of unaccredited investors. The SEC also found that offering materials for the sale of equity in OldCo misrepresented that investors' funds would be used only for corporate purposes. Contrary to those misrepresentations, millions of dollars were misdirected to benefit family members of Promoter I. 

OldCo has never generated any revenue from the engine design upon which it raised capital through the sale of more than $80 million of equity.

In January 2017, Promoters 1 and 2 introduced Fusion and Representative 1 to another broker-dealer (BD l) participating in Offering I. The issuer of the bonds (Issuer 1) described itself at the time as a wholly owned subsidiary of OldCo, Promoter I was among Issuer l's management and was still the president of OldCo. 

The offering was intended to raise $6 million of the necessary $7.75 million for the development of a power plant, which the Issuer I claimed would be developed with new clean energy technology patented by OldCo. Revenue from the power plant would be the 7 only source of revenue to pay the bonds. None of OldCo, Issuer I, Promoter 1, or Promoter 2 had any experience building or operating a power plant. 

Fusion participated in the offering, marketing the offering independently from BD 1. Fusion, through Registered Representatives I and 2, sold $860,000 of the bonds. 

failed to take steps to ensure that the substance of the SEC Order was disclosed to investors. Both the PPM and summary document provided lengthy biographies of Promoter 1 while omitting any mention of the SEC Order. The only reference to the SEC Order came in two other documents in the Dealbox that were mixed among more mundane documents, such as certificates of formation and documentation regarding the model of engine that might be purchased or installed in the power plant. One was a memo drafted by Promoters I and 2 disputing the findings of the SEC Order and claiming that "all the remuneration cited by the SEC is justifiable." The other was a Wells submission made by Promoter 1 and OldCo denying the SEC's allegations. Nothing in any of the documents contained any description of the findings of the SEC: they contained only denials. The presentation of information concerning the SEC Order was materially misleading and would have been discovered by Restrepo had he performed a reasonable investigation. 

• FINRA
• AWC
• Fusion
• Microcap
• Rule 3310
• FINRA Regulatory Notice 10-22
• AML
• WSP
• Rule 4511
• Private Placements
• BrokeAndBroker
• Bill Singer