Presentation Transcript

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   Bagging the Wolves of Wall Street: Crowd Sourcing Suspicious Activity Reporting in Penny Stocks William Casey King, Ben Johnson Phronesis, LLC Yale University
2. Suspicious Activity Reports Suspicious activity reporting forms the cornerstone of the BSA reporting system. It is critical to the United States’ ability to utilize financial information to combat terrorism, terrorist financing, money laundering, and other financial crimes.
3. Thinking Outside the Banking Box: Along with banking and insurance, the securities industry is one of the core industries through which persons and entities can access the financial system. This access provides opportunities for criminals to misuse the financial system to engage in money laundering (ML) and terrorist financing (TF).
4. A Gap in ML/TF Surveillance? In comparison to several other sectors and financial products, there is significantly less documentation on the ML and TF risks and vulnerabilities related to the securities industry.
5. Securities: A Growing Threat for Money Laundering and Terrorist Financing “As defences in areas more traditionally associated with ML/TF, such as banking, are tightened, the use of the securities industry may become a greater temptation to those seeking to disguise illicit proceeds, or indeed to generate them.” -Source: Financial Action Task Force Report (FATF): Money Laundering and Terrorist Financing in the Securities Sector, 2009
6. FATF: Identified Vulnerabilities in the Securities Industry 1. Physical Securities (Including Bearer Securities and Bills of Exchange) 2. Insurance Products 3. Low Priced Securities and Private Issuers: Penny Stocks, micro-cap, nano-cap
7. FATF: Identified Vulnerabilities in the Securities Industry 4. Options 5. Over-the-Counter Markets 6. Alternative Trading Platforms (ATPs), Electronic Communications Networks (ECNs) and Internet-Based Trading Accounts
8. Problem Traditional means for suspicious activity reporting require the cooperation and active participation of bank officers, compliance officers, brokers, broker dealers through the required filing of a suspicious activity report (SAR).
9. SARs and STRs: Under-Reported in Securities Industry
10. Some Reasons for Under-Reporting: 1. Financial incentives outweigh perceived risks: quota driven business. 2. Due to the fast pace of securities markets, transaction times are of critical importance. Intermediaries are required to act quickly on a client’s behalf, thus potentially affecting an intermediary’s ability (and perhaps inclination) to scrutinize and submit STRs 3. Lack of awareness of securities as a vehicle for ML/TF. Looking for insider trading, but not necessarily ML --------------------------------- 4. Many vulnerabilities can be located in the OTC market and through electronic intermediaries where there is no one to report.
11. Problem: How to Get at Suspicious Activity without SARs
12. What are the data signals for “suspicious activity” 1. Unusual Volume 2. Order executed above market rate 3. Order executed below market rate 4. Sharp Price Spikes and Falls 5. The anger and suspicion of the “crowd”
13. Crowd Sourcing Surveillance Investors have an interest in monitoring suspicious activity. Let’s let them help us do our due diligence.
14. Message Boards 1. Create a lexicon of suspicious activity “keywords” from a study of precious SEC action against stocks, and the message board activity that occurred at that time. 2. Expand the lexicon to include any words in the English language that suggest “suspicious activity.”
15. Shameless plug for my book:
16. Code for counting number of keyword hits and then calculating the raw and adjusted proportions posts <- # ... List of posts, where each post is a vector of words # Calculate keyword hits keyword_hits <- sapply(posts, function(x) sum(x %in% kw)) total_words  <- sapply(posts, length) # Bin keyword hits by week d <- as.xts(cbind(keyword_hits, total_words)) w <- apply.weekly(y, function(x) colSums(x)) # Proportion lower bound for each week w$raw_prop <- w$keyword_hits / w$total_words w$adj_prop <- sapply(1:nrow(w), function(i) binom.test(w$keyword_hits[i], w$total_words[i])$conf.int[1])
17. Does it work? Spikes in both volume and suspicious activity index attributed to: Accredited Business Consolidation Corp. TCKR: ACDU
18. Accredited Business Consolidation Corp. (ACDU) What precipitated the volume spike and price increase? A couple of newsworthy items: 1. A takeover by Abraham Blauvelt, Ltd. 2. The purchase of 300 acres of land in Bluefields, Nicaragua 3. The departure of their President, Joanne Chmielewska Are these suspicious activities? .
19. 1Who or What is Abraham Blauvelt? According to filings with the SEC, Abraham Blauvelt, Ltd. is an “Asian, American, and Latin American investment firm comprised of over forty individuals and entities” who choose to remain anonymous. But…Abraham Blauvelt is also….
20. The Other Abraham Blauvelt: An infamous Dutch Pirate that was active during the middle 1600’s in New Amsterdam (New York) and Nicaragua. But just because an anonymous investment company is named for an infamous thief and pirate, doesn’t necessarily make the principals thieves and pirates. Let’s consider the change in director reported in their SEC filing
21. SEC Filing: Accredited Business Consolidators Corp. November 5, 2013: Form 8K “The Company announced the departure of Joanna Chmielewska as officer and director pursuant to a directive of Abraham Blauvelt Ltd., preferred shareholder. ”
22. ACDU: Form 8K (continued) “All compensation owed to Ms. Chmielewska will be paid by Abraham Blauvelt Ltd.. . . Abraham Blauvelt Ltd. agreed to pay Ms. Chmielewska, who never received a salary, a termination fee of $1,350,000. The payment will be paid by Abraham Blauvelt Ltd. The Company thanks Ms. Chmielewska for her services which included lucrative land projects.”
23. Who is Joanna Chmielewska? a. A Polish crime novelist and screenwriter who died in October of 2013. b. The former president of ACDU known for her lucrative land deals. c. The sole director of My Pleasure, Inc. a company that sells sex toys over the internet. d. All of the above.
24. Answer: All of the Above, but… The President of ACDU is not the crime novelist, though she shares her name (or perhaps the same people/person that chose Abraham Blauvelt has an ironic sense of humor). There is a Joanna Chmiewleska who manages to negotiate lucrative land deals WHILE directing an internet sex toy company that reports 50-100 million USD in sales a year.
25. How do we know it’s the same Joanna Chmielewska? Because ACDU is partially owned by My Pleasure, Inc. as reported in their publically available SEC filing of form 10 Q of 11/20/2012: Note 9: 　 Capital 　 　 　 　 　 　 “In 2008, The Company issued 5,000,000 shares to My Pleasure Ltd. For 0.03 per share. This result in the new share being listed with the previously issued and outstanding common stock.”
26. But what is their Business Sector and What are their Other Holdings? Is this Consistent? Accredited Business Consolidators Corp. (the "Company" or "accredited") was organized in 1990 under the name Fornello USA, Inc. Accredited changed its name to The Italian Oven, Inc., to reflect the operation of various Italian restaurants. However, in October 1996, the company had no funds to sustain itself, and filed for protection under Chapter 11 of the United States Bankruptcy Code, presented a plan with the Bankruptcy Court, which stripped it of most assets, including intellectual property. 　 The plan provided no payment to shareholders, but it did not cancel or terminate the common shares of the company. The Bankruptcy Court of the United States for the Western District of Pennsylvania approved the bankruptcy plan and on July 17, 1998, the Company emerged from bankruptcy. 　
27. After the company emerged from bankruptcy, and until December 31, 2007, the company did not conduct any business. It had no operations or assets. Instead, it simply remained dormant while the administration sought an opportunity for its shareholders. The Company has no restaurants and is not affiliated with the restaurants that bear his name. 　 In late 2008, My Pleasure Ltd. bought the controlling interest of the Company with the intent to locate business opportunities. 　 Since then, the company has been exploring diversified business ventures in the fields of marketing hospitality, travel, among other things.
28. Other “Investments” “We own 1,000,000 shares of James Monroe Capital Corp., an entity that trades on the over the counter market as JMCP.  We paid $200.00 for the shares.  We revalued the shares base on market value as of December 31, 2011, at $100.00, or $.0001 per share.  We know little about JMCP except that our investigation demonstrated that it appears to be part of a stock fraud scheme that issues shares pursuant to fraudulent and inflated debt.”
29. Lucrative Land Deal that Joanna was Rewarded for with 1.8 million? “We purchased 43,639,950 common shares and 1,000,000 preferred shares of Hiland Terrace Corp., an entity that owned the Hiland Terrace Hotel and Office Center in North Huntingdon, Pennsylvania.”
30. Hiland Hotel and Office Center From Trip Advisor: “Funny hodgepodge of rooms” Reviewed September 10, 2009 “We were looking for somewhere cheap to stay near Kennywood, and this place looked okay. The owner showed me one room, but then decided we'd have more privacy in another. Apparently he rents by the hour. At least he was up front about that. . .We ended up in a carport room. It was small, and looked clean. Unfortunately, there was a lot of hair on the sheets. I was able to brush it off before my wife saw it. I'm praying that it just didn't come out in the dryer. I also hid the ashtray with gum in it behind one of the lamps. . . The bed was decently comfortable, and it was quiet at night. It looked like he didn't get any hourly clients, there were only two other cars there when we got back. All in all, it wasn't terrible, but I'd just as soon try one of the other nearby motels next time.”
31. ACDU: Would an SAR Have Been Filed by a Compliance Officer? Based on the FINRA requirements for SARs the likely answer is “yes.” This is not to say that Accredited Biz has done anything wrong, but simply that it merits a closer look.
32. ML/TF in the Securities Industry 1. Surveillance is possible even without a SAR or STR 2. This “case study” was made through publicly available data. 3. Volume and price irregularities in conjunction with suspicious “sentiment” to crowd source surveillance can fill the gap left by SARs. 4. Investors have an interest in monitoring suspicious activity.
33. Why does this matter?
34. FINRA Fines Brown Brothers Harriman a Record $8 Million for Substantial Anti-Money Laundering Compliance Failures Highest Fine Levied by FINRA for AML-Related Violations; Former AML Compliance Officer Also Fined and Suspended WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined New York-based Brown Brothers Harriman & Co. (BBH) $8 million for substantial anti-money laundering compliance failures including, among other related violations, its failure to have an adequate anti-money laundering program in place to monitor and detect suspicious penny stock transactions.
35. Thanks
36. Red Flags Involving Penny Stock Companies 1. Company has no business, no revenues and no product. 2. Company has experienced frequent or continuous changes in its business structure. 3. Officers or insiders of the issuer are associated with multiple penny stock issuers. 4. Company undergoes frequent material changes in business strategy or its line of business. 5. Officers or insiders of the issuer have a history of securities violations. 6. Company has not made disclosures in SEC or other regulatory filings. 7. Company has been the subject of a prior trading suspension.