SEC Charges J.H. Darbie & Co with Anti-Money Laundering Violations
On December 12, 2022, the Securities and Exchange Commission (the “SEC”) charged J.H. Darbie & Co., Inc., a New York City-based brokerage firm, with failing to report suspicious activity related to transactions in tens of billions of shares of low-priced securities – or “penny stocks” – that were traded in over-the-counter markets.
To help detect potential securities law and money-laundering violations, broker-dealers are required to file Suspicious Activity Reports (SARs) describing suspicious transactions taking place through their firms.
According to the SEC’s complaint, from at least January 2018 to January 2020, J.H. Darbie had written anti-money laundering policies and procedures (“AML P&P”) requiring that J.H. Darbie file a SAR consistent with the BSA and its implementing regulations. But despite the policies and procedures, J.H. Darbie failed to investigate and file SARs for numerous suspicious transactions, even when the transactions raised red flags recognized in J.H Darbie’s written anti-money laundering policies and procedures and in regulatory guidance.
According to the SEC, J.H. Darbie failed to monitor for new promotional activity occurring in connection with the conversion and deposits of low-priced securities, failed to monitor instances involving “rapid-fire” stock conversions aggregating to substantial amounts of the shares outstanding or public float, and failed to monitor the trading activity in connection with the deposit and withdrawal activity—all indicia of potentially illegal conduct.
The complaint alleges J.H. Darbie accepted for deposit the low-priced securities of approximately 160 issuers reflected in approximately 1,800 deposits at one of its clearing brokers, processing approximately $105 million in net transaction proceeds to customers through approximately 12,000 sale transactions involving 30 billion shares of such issuer between January 2018 and January 2020.
Despite multiple indicia of suspicious activity in connection with many of those transactions, the J.H. Darbie employee primarily responsible for handling such deposits and liquidations never reported a single transaction as potentially suspicious to the AML compliance officer.
- In at least 168 instances, J.H. Darbie failed to investigate or file SARs in connection with suspicious DSW activity, specifically where a customer deposited shares of a low-priced security issuer into its account, sold the shares for proceeds totaling at least $50,000, and the same customer withdrew at least $50,000, all within 31 or fewer calendar days.
- On at least 74 occasions, one of the broker-dealer firms that cleared J.H. Darbie’s transactions rejected a deposit of low-priced securities by a J.H. Darbie customer, but J.H. Darbie did not conduct an investigation or file a SAR in connection with the deposits.
- In at least 32 instances, J.H. Darbie failed to file a SAR where transactions had two or more red flags identified in J.H. Darbie’s AML P&P. In many of these instances, J.H. Darbie also did not investigate the transactions.
The volume of shares and transactions in the issuers referenced in the SEC complaint by the same clients and the mention of conversion activity suggests that the transactions may have been on behalf of toxic lenders.
- Between August 2018 and December 2019, J.H. Darbie facilitated the deposit of more than 1.35 billion low-priced securities of “Issuer A” and the sale of more than 1.1 billion of those securities, by two of its customers, Client 1 and Client 2.
- Between August and November 2018, J.H. Darbie accepted the deposit and facilitated the sale transactions of over 1.5 billion low-priced securities of “Issuer B” by Client 1 and Client 2. The 1.5 billion shares constituted nearly 70% of Issuer B’s issued and outstanding shares as of November 30, 2018.
- Between January 2018 and December 2019, J.H. Darbie facilitated the deposit and sale of over 13 million low-priced shares of “Issuer C” by ten J.H. Darbie clients.
- In a three-month period between May 2018 and July 2018, J.H. Darbie facilitated the deposit and sale of over 3.8 million low-priced securities of “Issuer D” by Client 4.
In fact, according to the J.H. Darbie website, J.H. Darbie does have a special relationship with penny stock financiers having acted as a finder, connecting dozens of public issuers trading on the over-the-counter market with penny stock financiers.
A review of SEC filings shows that the financing was primarily in the form of variable-rate convertible notes. Common lenders disclosed in SEC filings participating in the J.H. Darbie facilitated fundings included LGH Investments LLC, Auctus Fund LLC, FirstFire Global Opportunities Fund LLC, GHS Investments LLC, and Labrys Fund LP.
The SEC’s complaint, filed in federal district court in Manhattan, charges J.H. Darbie with violations of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder and seeks permanent injunctive relief and civil monetary penalties.
J.H. Darbie has been sanctioned by the Financial Industry Regulatory Authority (FINRA), a number of times in the past and was previously named in an Administrative Order by the SEC related to the Calissio Resources Group clearing disaster involving a special cash dividend and nefarious offshore and promotional activities.
To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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Brenda Hamilton, Securities Attorney
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