October 2, 2023

SEC settles with investment advisor regarding failure to file SARs

The Securities and Exchange Commission recently settled with Pierre Economacos, an investment advisor with an unnamed US-based broker-dealer, to resolve allegations that he failed to report a group of suspicious and unusual transactions for a long-time customer (“the Customer”) resulting in his firm’s failure to file a Suspicious Activity Report (“SAR”) regarding activity that violated the Securities Exchange Act of 1934.

According to the SEC’s Order, the alleged violation stems from a 2019 transaction in which Economacos, pursuant to the Customer’s request, wired $50,000 to an outside brokerage account belonging to the Customer’s close relative (“the Relative”) who allegedly needed a loan for an upcoming real estate transaction.  The Relative, who happened to be a Economacos’s friend of more than 15 years, had introduced Economacos to the Customer and to another client who was an Executive at an unnamed company (“Executive”).  While the Relative had never been a client of the firm or of Economacos, Economacos had serviced brokerage accounts for the Customer and the Executive since 2011, before he joined the current firm in 2016.  Three days after the funds were transferred to the Relative, the company where the Executive worked announced that it would be acquired causing the company’s stock price to increase by approximately 30 percent.  According to the SEC, Economacos knew that the Executive worked for this company and learned of the company’s acquisition on the Announcement Date.  One day after the announcement, the Relative wired $50,000 back to the Customer’s account and, over next five days, sent two additional wires of $90,000 each from brokerage accounts that the Relative controlled, which were in the names of two immediate family members.

The SEC asserts that Economacos was obligated to report the transfers between the Customer and the Relative, which occurred relatively close in time to the acquisition announcement of the Executive’s company.  According to the SEC, the transactions were unusual in the context of the Customer’s account history and reportable for a few reasons.  First, the Customer had no history of incoming wires since his accounts had been with the firm.  Second, the Customer had never sent any money to the Relative’s brokerage account since his accounts had been with the firm.  Third, while the Relative had borrowed funds from the Customer prior to opening accounts at the firm, the Relative had never paid the Customer back for any funds that he had borrowed since 2011.  Fourth, the Customer’s account had never received funds from the accounts in the names of the Relative’s two immediate family members – individuals who happened to be students at the time of the wires.

According to the SEC’s order, Economacos’ failure to inform the Firm’s AML group of the wire transfers surrounding the acquisition announcement caused the firm’s failure to timely file a SAR related to these transactions, which violated Section 17(a) of the Exchange Act and Rule 17a-8 thereunder.  Without admitting or denying these findings, Economacos agreed to cease and desist from committing any of the charged violations in the future and agreed to pay a $20,000 civil penalty.

On September 18, 2023, the day that SEC announced the settlement with Economacos, SEC Commissioner Hester Peirce and Commissioner Mark Uyeda issued a dissent to the SEC’s order.  According to the Commissioners, the order “fails to explain adequately how and why a loan, and subsequent repayment, between close family members amounts to suspicious activity under the Treasury rule.”  The Commissioners disagreed that the transactions presented red flags that merited a SAR, especially when considering that Economacos had witnessed the Customer loan funds to the Relative before he worked for the firm.  They felt that there was nothing inherently suspicious about liquidating securities to pay a debt even after a long period of non-payment.  In addition, considering that Relative was never a client of Economacos, the Commissioners believed that there was also no evidence to support that he knew or should have known about Relative’s finances or securities holdings at other firms.  Consequently, the Commissioners feared that the order “sets an impossibly high standard” for registered representatives that may be detrimental to the SAR program because it encourages them “to view all flags as various shades of red…[t]hat, in turn, may prompt compliance departments to see red in every flag and file unnecessary SARs” – a practice that will impose extra costs on firms and ultimately make reporting less useful.

SEC Press Release | SEC Order | Commissioners’ Statement