Brokerage firm, Canaccord Genuity Group Inc., is paying US$75 million to settle allegations from U.S. regulators that, due to deficiencies in its compliance systems and controls, the firm failed to guard against manipulative trading and other illicit activity.
Michael Auerbach, lead independent director of Canaccord Genuity, said in a release, “The board is satisfied that these regulatory matters are now resolved and that the underlying conduct is in our past.”
Canaccord’s U.S. subsidiary, Canaccord Genuity LLC, reached a settlement with a trio of U.S. regulators — the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority Inc. (FINRA), and the Treasury’s Financial Crimes Enforcement Network (FinCEN) — which alleged that the firm failed to adequately oversee, and report, potentially-suspicious activity in its equity trading business.
“Canaccord’s violations involved several different issues, but at its core, Canaccord failed to devote adequate resources to ensure compliance with the [Bank Secrecy Act],” FinCEN’s order said.
According to the SEC’s order, between February 2019 and March 2022, Canaccord didn’t have an adequate anti-money laundering (AML) surveillance program to detect, investigate and report suspicious activity within its equity trading business.
“At the time, Canaccord’s AML surveillance relied in large part on the review of trading activity flagged as potentially suspicious by internal AML exception reports,” it said — to identify patterns of potentially manipulative trading activity, such as wash trading, or trading to facilitate “pump and dump” schemes.
However, the SEC alleged that some of those reports didn’t collect adequate data, and that the firm’s compliance personnel was sometimes slow to review reports that flagged thousands of potentially-suspicious trades — leaving reports that, “went completely unreviewed for months or years at a time.”
For instance, the firm’s “low volume” report — which was designed to examine trading in lightly-traded penny stocks that are vulnerable to manipulation — allegedly went unreviewed from June 2019 through March 2022.
Also, various reports from the firm’s market making and institutional trading businesses weren’t reviewed for months, the SEC noted. And, it said that the firm discovered, and reported to FINRA, that certain employees falsely documented reviews that they claimed to have carried out.
As a result, the SEC alleged that the firm failed to investigate, or to file 150 suspicious activity reports, which breached U.S. exchange rules.
FinCEN’s enforcement order covered a longer time period, from March 2018 through June 2024, also flagged weaknesses in the firm’s know-your-client (KYC) and onboarding procedures, and alleged that the firm failed to file 160 reports of potentially suspicious activity involving dozens of over-the-counter stocks.
It also alleged that the deficient oversight allowed real harm to occur, including enabling manipulative trading schemes, and allowing access to the U.S. financial system by illicit actors with ties to Russia and Venezuela.
“Canaccord’s AML compliance failures … occurred over an extended period of time, and its failure to have an AML compliance program that appropriately took into account its high-risk lines of business resulted in trading through Canaccord involving numerous fraud schemes that ultimately caused significant economic harm to innocent investors,” FinCEN’s order said.
To settle the allegations, the firm agreed to pay US$80 million — including US$20 million to the SEC, US$20 million to FINRA and US$35 million to the Treasury (FinCEN agreed to suspend US$5 million of the penalty pending compliance with an undertaking) — to be censured, and to cease and desist from further violations.
The SEC said that it agreed to the settlement, given Canaccord’s efforts to beef up compliance — including increased staffing, updated reports and revised processes for examining and reporting suspicious trading activity. The firm also hired outside compliance consultants to review its updated policies and procedures.
Canaccord said that the settlement — which is expected to amount to US$75 million (C$102.6 million) — won’t have a material impact on its financials.
“Since these matters came to light, we have overseen a wholesale change in compliance leadership and oversight, working closely with management to enhance the culture of compliance, while engaging constructively with regulators. This reflects our responsibility to all stakeholders and our enduring commitment to maintaining trust, transparency and sound governance,” Auerbachsaid.
“Today’s action should be a wake-up call to broker-dealers that willfully fail to comply with their obligations to safeguard the financial system from illicit actors,” said FinCEN director, Andrea Gacki, in a release.