Second Circuit affirms $12 million penalty for SARS reporting failures

On December 4, 2020, the US Court of Appeals for the Second Circuit affirmed the district court ruling in a Bank Secrecy Act case brought by the US Securities and Exchange Commission.  The civil enforcement action by the SEC against Alpine Securities Corporation, a registered broker-dealer specializing in penny stocks and micro-cap securities, was initiated in June 2017.  The SEC claimed that Alpine had violated the reporting and record-keeping requirements of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder by failing to file Suspicious Activity Reports in compliance with the Bank Secrecy Act.  The evidence submitted by the SEC revealed numerous deficiencies in Alpine’s SAR reporting standards and submissions since 2012, leading the Financial Industry Regulatory Authority to conclude that the company was intentionally obscuring the suspicious nature of certain transactions. 

The district court granted partial summary judgment to the SEC based on 2,720 violations of Rule 17a-8 by Alpine for submitting SARs with deficient narratives, for failing to submit SARs on deposit-and-sales patterns, and for failing to retain supporting documentation for the company's SARs.  The district court denied Alpine’s motion for summary judgment, enjoined Alpine from further violations of Rule 17a-8, and imposed a civil penalty of $12 million. 

On appeal, Alpine challenged the SEC’s authority to enforce the SAR obligations of the BSA, and claimed that Rule 17a-8 is invalid because it is not a reasonable interpretation of the Securities Exchange Act of 1934.  The Second Circuit rejected Alpine’s argument that the SEC is enforcing the BSA, explaining that the SEC acted within its rulemaking authority when it promulgated Rule 17a-8 requiring broker-dealers to comply with the BSA in order to comply with the recordkeeping and reporting requirements of the Exchange Act, and that enforcement of the rule does not constitute SEC enforcement of the BSA.  The court thus held that the SEC’s interpretation of Section 17(a) of the Exchange Act, as expressed in Rule 17a-8, is reasonable and within the purview of the SEC’s authority, and that Rule 17-a-8’s incorporation of BSA reporting obligations properly serves the goal of regulatory enforcement.

The court also rejected Alpine’s contention that Rule 17a-8 violates the notice and comment requirement of the Administrative Procedure Act, noting that the SEC made clear in its request for public comment that Rule 17a-8 would incorporate future SAR reporting requirements imposed by the Treasury, that the Financial Crimes Enforcement Network also requested comments on its SAR reporting requirements for broker dealers (31 CFR § 1023.320), and expressly notified the public that the SEC would continue to enforce the reporting requirements of the BSA.

Finally, the court found Alpine’s challenge to the penalty amount to be without merit. 

Opinion and order 

You are currently offline.