By Rodney F. Tonkovic, J.D.
A broker-dealer hit with a $12 million civil penalty for filing deficient Suspicious Activity Reports has brought an appeal to the Second Circuit. Alpine Securities Corporation argues that the SEC was enforcing provisions of the Bank Secrecy Act that have been expressly delegated to another agency. The Commission's asserted toehold in doing so lies in the books-and-records provisions of the Exchange Act, but to claim that these provisions incorporated parts of the BSA enacted years later violates the notice and comment requirements of the Administrative Procedure Act, Alpine maintains. Finally, Alpine maintains that the district court abused its discretion through the sheer size of the penalty (SEC v. Alpine Securities Corporation, January 6, 2020).
Suspicious money laundering reporting requirements. The Bank Secrecy Act (BSA) requires broker-dealers to file a Suspicious Activity Report (SAR) with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to report certain transactions that the broker-dealer has reason to suspect involve funds from an illegal activity, are designed to evade BSA requirements, have no business or lawful purpose, or involve the use of the broker-dealer to facilitate illegal activity.
Alpine's SARs. Alpine Securities Corporation, a broker-dealer providing clearing services for microcap securities, had been charged by the SEC with violating Exchange Act Rule 17a-8 by filing fatally deficient SARs or by failing to file any SAR when it had a duty to do so. A strict-liability provision, Rule 17a-8 requires compliance with BSA regulations that govern the filing of SARs by broker-dealers. According to the complaint, Alpine routinely failed to identify and report suspicious activity of which it was aware. Among other deficiencies, the SARs lacked required information such as why underlying transactions were suspicious, the relevant criminal or regulatory history of the customers, the involvement of shell companies, and certain red flags for "pump and dump" schemes.
In September 2019, the Southern District of New York imposed a permanent injunction and $12 million civil penalty against Alpine. The court found that the Commission met its burden of showing over 2,700 separate violations and that a request for a penalty of over $22 million was not disproportionate. A lower, first-tier, civil penalty was imposed in light of Alpine's financial condition. The court noted that the scale and duration of the violations undermined Alpine’s assertion that its conduct was merely negligent.
Can the SEC enforce BSA? On appeal, Alpine argues that the SEC does not have the authority to enforce the SAR provisions of the BSA via Rule 17a-8. According to Alpine, Congress expressly delegated the power to administer and enforce the BSA to the Department of the Treasury as delegated to FinCEN. While this case was nominally brought under Rule 17a-8, the claims were predicated solely on violations of the BSA, the brief posits. While the district court found authority in the Exchange Act, Alpine counters that Section 17(a)'s authority over reporting does not even mention the BSA, and finding otherwise would permit the Commission to invade an authority specifically given to another agency in another statute. Courts, including the Second Circuit, have consistently rejected attempts by agencies to expand their own jurisdiction, the brief says.
The brief also takes issue with the district court's acceptance of the Commission's position that Rule 17a-8 evolved over time to incorporate the SAR provisions of the BSA, despite the rule having been adopted a decade earlier. This assertion, Alpine says, amounts to the incorporation of future legislation without notice, publication, or comment, in violation of the Administrative Procedure Act and Federal Register Act. Incorporating future statutes promulgated by a different agency also raises a delegation issue: if the requirements of Rule 17a-8 change every time FinCen amends the BSA regulations, FinCen, not the SEC, is engaging in rulemaking under Exchange Act Section 17(a). Moreover, the rules of the Office of the Federal Register state that formal approval is required to incorporate materials by reference.
Alpine notes here that the district court also failed to consider and apply Kisor v. Wilkie. The Supreme Court issued Kisor while remedies briefing was taking place, but the district court denied Alpine's motion for reconsideration. The court applied Auer deference, but Alpine contends that it committed errors discussed in Kisor, namely, not exhausting the statutory construction analysis and by giving controlling weight to an agency position that did not deserve it.
Other arguments. Next, Alpine argues that the district court adopted "novel" theories that "snippets" culled from industry guidance created automatic requirements for the filing of SARs. This approach, the brief argues, is at odds with FinCEN's approach to BSA enforcement. In short, the court's acceptance of the SEC's emphasis on "red flags" has created a new filing trigger where no such mandatory narrative requirement had been previously imposed. In arriving at this conclusion, the district court erroneously deferred to the SEC's interpretation of FinCEN's guidance, the brief says. And, there were material issues of fact with respect to whether Alpine's SARs were deficient at all; the brief claims that the court disregarded significant evidence from Alpine's fact and expert witnesses on this point.
Finally, the brief argues that the $12 million penalty is "unprecedented" and that the district court relied on impermissible factors while disregarding evidence in imposing it. Here, Alpine asserts that the penalty is "exponentially" greater than the maximum that would be imposed under the comparable BSA provisions (which would amount to $1.36 million in this case). It is not logical to increase a maximum penalty from $500 to $80,000 for the same violation simply because the SEC is the plaintiff, Alpine says. Plus, there was no evidence of illicit gain, fraud, or losses to victims. Alpine pointed out in closing that the penalty is so far in excess of its ability to pay that it would force closure of the firm.
The case is No. 19-3272-cv.