United States Securities and Exchange Commission v. Alpine Securities Corporation
Filing
235
AMEND REDACTED OPINION AND ORDER........The SECs May 3 motion for remedies is granted in part. Alpine shall pay a civil penalty in the amount of $12,000,000. An injunction will be entered against Alpine. (Signed by Judge Denise L. Cote on 9/12/2019) (gr)
Case 1:17-cv-04179-DLC Document 235 Filed 09/26/19 Page 1 of 36
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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UNITED STATES SECURITIES AND EXCHANGE :
COMMISSION,
:
:
:
Plaintiff,
:
-v:
:
ALPINE SECURITIES CORPORATION,
:
:
Defendant.
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:
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17cv4179(DLC)
AMENDED REDACTED
OPINION AND ORDER
For the plaintiff:
Zachary T. Carlyle
Terry R. Miller
U.S. Securities and Exchange Commission
1961 Stout Street, 17th Floor
Denver, CO 80294
For the defendant:
Maranda E. Fritz
Thompson Hine LLP
335 Madison Avenue, 12th Floor
New York, NY 10017
Brent R. Baker
Aaron D. Lebenta
Jonathan D. Bletzacker
Clyde Snow & Sessions
One Utah Center, 201 South Main Street, Suite 1300
Salt Lake City, Utah 84111
DENISE COTE, District Judge:
Plaintiff United States Securities and Exchange Commission
(“SEC”) seeks an injunction and imposition of $22,736,000 in
civil penalties against defendant Alpine Securities Corporation
(“Alpine”) for Alpine’s 2,720 violations of its obligation to
Case 1:17-cv-04179-DLC Document 235 Filed 09/26/19 Page 2 of 36
file suspicious activity reports (“SARs”).
Alpine opposes
imposition of any injunction and contends that the civil
penalties should not exceed $720,000.
For the following
reasons, an injunction will issue against Alpine and civil
penalties are assessed in the amount of $12,000,000.
Background
Much of the factual and regulatory background relevant to
this motion is described in the two summary judgment Opinions
issued in March and December 2018.
See SEC v. Alpine Sec.
Corp., 308 F. Supp. 3d 775 (S.D.N.Y. 2018) (“March Opinion”);
SEC v. Alpine Sec. Corp., 354 F. Supp. 3d 396 (S.D.N.Y. 2018)
(“December Opinion”). 1
Familiarity with those Opinions is
assumed and they are incorporated by reference.
The Low-Priced Securities Market
Alpine principally provides brokerage clearing services for
penny stocks and microcap securities traded in the over-thecounter market. 2
The markets for these low-priced securities
The March Opinion granted summary judgment on certain exemplar
SARs. Applying the legal standards articulated in the March
Opinion, the December Opinion addressed all of the individual
SARs on which the SEC sought summary judgment and granted that
motion in part.
1
The term “over-the-counter market” is used to describe “the
trading of securities other than on a formal centralized
2
2
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(“LPS”) are rife with fraud and abuse.
The Penny Stock Reform
Act of 1990, for example, identified as problems with the penny
stock markets “a serious lack of adequate information concerning
price and volume of penny stock transactions,” involvement by
individuals banned from the securities markets in roles such as
“promoters” or “consultants,” and the use of shell corporations
to facilitate market manipulation schemes.
Pub. L. No. 101-29,
§ 502(6)-(8), 104 Stat. 931, 951; see also December Opinion, 354
F. Supp. 3d at 406.
Financial regulators like FINRA, 3 FinCEN, 4 and the SEC have
warned investors of the risks of fraud connected to investments
in LPS.
FINRA has warned investors, in particular, about the
risk that the issuer of a penny stock may be a shell company for
those seeking to launder money or conduct illicit activity. 5
The
exchange” such as the New York Stock Exchange. 4 Hazen,
Treatise on the Law of Securities Regulation § 14:3 (2017).
FINRA, or the Financial Industry Regulatory Authority, is a
self-regulatory organization (“SRO”) that supervises brokerdealers. See Fiero v. Financial Industry Regulatory Auth.,
Inc., 660 F.3d 571 & n.1 (2d Cir. 2011).
3
FinCEN, or the Financial Crimes Enforcement Network, is a
division of the U.S. Department of the Treasury (“Treasury
Department”) responsible for administering the Bank Secrecy Act
(“BSA”), among other things. See March Opinion, 308 F. Supp. 3d
at 791.
4
See FINRA, Beware Dormant Shell Companies (Mar. 14, 2016),
http://www.finra.org/investors/beware-dormant-shell-companies;
see also FinCEN, The Role of Domestic Shell Companies in
Financial Crime and Money Laundering: Limited Liability
5
3
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SEC has observed that “information about microcap companies can
be extremely difficult to find, making them more vulnerable to
investment fraud schemes and making it less likely that quoted
prices in the market will be based on full and complete
information about the company.” 6
Regulatory Framework
The Bank Secrecy Act (“BSA”), 31 U.S.C. § 5311, et seq.,
first enacted in 1982, requires broker-dealers like Alpine to
file SARs.
Under the BSA, the Secretary of the Treasury may
“require any financial institution . . . to report any
suspicious transaction relevant to a possible violation of law
or regulation.”
31 U.S.C. § 5318(g)(1).
The Secretary has
delegated this authority to FinCEN, 7 and, in 2002, the Treasury
Department and FinCEN promulgated 31 C.F.R. § 1023.320 (“Section
1023.320”). 8
Companies (Nov. 2006), https://www.fincen.gov/sites/default/
files/shared/LLCAssessment_FINAL.pdf.
SEC, Microcap Stock: A Guide for Investors (Sept. 18, 2013),
https://www.sec.gov/reportspubs/investor-publications/investor
pubsmicrocapstockhtm.html.
6
See Treasury Order 180-01, 67 Fed. Reg. 64,697, 64,697 (Oct.
21, 2002).
7
See FinCEN, Amendment to the Bank Secrecy Act Regulations -Requirement that Brokers or Dealers in Securities Report
Suspicious Transactions, 67 Fed. Reg. 44,048 (July 1, 2002)
(“FinCEN Section 1023.320 Notice”). The USA PATRIOT ACT of
2001, Pub. L. No. 107-56, 115 Stat. 272 (the “Patriot Act”),
significantly expanded the scope of the BSA.
8
4
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As described in greater detail in the December Opinion,
Section 1023.320 provides that “[e]very broker or dealer in
securities within the United States . . . shall file with
FinCEN, to the extent and in the manner required by this
section, a report of any suspicious transaction relevant to a
possible violation of a law or regulation.”
§ 1023.320(a)(1) (emphasis added).
31 C.F.R.
Under Section 1023.320, a
transaction requires reporting if it is “conducted or attempted
by, at, or through a broker-dealer,” “involves or aggregates
funds or other assets of at least $5,000,” and the broker-dealer
“knows, suspects, or has reason to suspect” that the transaction
(or pattern of transactions) “[i]nvolves use of the brokerdealer to facilitate criminal activity.”
Id.
§ 1023.320(a)(2)(iv).
In addition, Section 1023.320 requires a broker-dealer to
retain a copy of any SAR filed and supporting documentation “for
a period of five years from the date of filing the SAR.”
§ 1023.320(d).
Id.
It further requires a broker-dealer to “make all
supporting documentation available to FinCEN or any Federal,
State, or local law enforcement agency, or any Federal
regulatory authority that examines a broker-dealer for
compliance with the Bank Secrecy Act, upon request.”
Id.
SARs are currently submitted to FinCEN via an electronic
5
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SAR Form. 9
The SAR Form states that the narrative section of the
SAR “is critical.”
2002 SAR Form at 3 (emphasis in original).
It further provides,
The care with which [the narrative section] is
completed may determine whether or not the described
activity and its possible criminal nature are clearly
understood by investigators. Provide a clear,
complete and chronological description . . . of the
activity, including what is unusual, irregular or
suspicious about the transaction(s), using the
checklist below as a guide.
Id. (emphasis in original).
FinCEN has issued several guidance documents explaining the
scope of the SAR reporting duty in the narrative section of the
SAR Form.
A summary of that guidance, including examples of
relevant information identified by FinCEN, is provided in the
December Opinion.
See 354 F. Supp. 3d at 415. 1
As the Treasury Department has explained, the SEC enforces
SAR regulations pursuant to Section 17(a) of the Securities
As explained in the December Opinion, two versions of the SAR
Form were in effect during the period at issue in this
litigation: one version from 2002 to 2012 (the “2002 SAR Form”)
and another version after 2012 (the “2012 SAR Form”). See
December Opinion, 354 F. Supp. 3d at 413 n.18. In connection
with the 2012 SAR Form, FinCEN published an instructional
document. See FinCEN, FinCEN Suspicious Activity Report (FinCEN
SAR) Electronic Filing Instructions (2012), https://www.fincen.
gov/sites/default/files/shared/FinCEN% 20SAR% 20ElectronicFiling
Instructions-% 20Stand% 20Alone% 20doc.pdf (“2012 SAR
Instructions”). The 2012 SAR Instructions are similar to those
in the 2002 SAR Form in all respects that are material to this
litigation.
9
6
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Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78a, et seq.,
and SEC Rule 17a-8.
Rule 17a-8 requires a broker-dealer to
“comply with the reporting, recordkeeping and record retention
requirements of chapter X of title 31 of the Code of Federal
Regulations.”
17 C.F.R. § 240.17a-8.
The reporting,
recordkeeping, and retention requirements incorporated by Rule
17a-8 include those described in Section 1023.320.
See December
Opinion, 354 F. Supp. 3d at 411-12.
Alpine’s Failure to Comply with SAR Regulations
Alpine is a clearing broker that primarily provides
clearance and settlement services for microcap securities traded
in the over-the-counter market.
owner in early 2011.
It was purchased by its current
That owner also owns Alpine’s affiliate
Scottsdale Capital Advisors (“SCA”), the introducing broker for
most of the transactions at Alpine that are at issue here.
SCA
settled a FINRA enforcement action in November 2011 that the SEC
had brought for, among other things, SCA’s own failure to file
SARs and its omission of material information from the SARs it
did file. 10
From March 2, 2011 through January 22, 2012, FINRA
See Order Accepting Offer of Settlement, In the Matter of
FINRA Department of Enforcement v. Scottsdale Capital Advisors
Corp. and Justine Hurry, Disciplinary No. 2008011593301 at 1112, 21-22 (Nov. 14, 2011), https://www.finra.org/sites/default/
files/fda_documents/2008011593301_FDA_TX93804.pdf.
10
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conducted a financial, operational, and sales practices
examination of Alpine.
On July 23, 2012, FINRA shared its
highly critical findings with Alpine during an exit meeting.
On
September 28, 2012, FINRA issued its seven-page report of that
examination (“FINRA Report”), documenting Alpine’s widespread
failures to comply with its obligations under the regulations
that govern its industry.
The FINRA Report identified ten exceptions to Alpine’s
practices.
It disclosed that Alpine failed to timely file any
SARs for over six months in 2011 (from March 1 through May 10,
and from August 16 through December 19).
FINRA concluded that
the SARs Alpine later filed for transactions occurring during
this period were all filed late.
The FINRA Report concluded
more generally that Alpine had “failed to establish and enforce
procedures reasonably designed to detect and report suspicious
activity.”
In addition, the FINRA Report determined that the narrative
sections of the 823 SARs that Alpine filed during the
examination period were “substantively inadequate” and in
violation of Section 1023.320.
The FINRA report emphasized that
the narratives for Alpine’s SARs “failed to fully describe why
the activity was suspicious” and therefore “fail[ed] to justify
at the basic core the legitimacy of the SAR filing.”
It
criticized Alpine for submitting SARs in the form of two basic,
8
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boilerplate templates, “neither of which were substantively
adequate as they failed to fully describe why the activity was
suspicious.”
As the December Opinion confirmed, Alpine’s SAR narratives
were woefully inadequate.
Over half of the SARs on which the
December Opinion granted summary judgment were deficient in
several significant respects, failing to include multiple pieces
of information that the SAR Form and its instructions require to
be included.
See December Opinion, 354 F. Supp. 3d at 420.
During and after the FINRA examination, Alpine’s ownership
hired additional legal and compliance personnel and took some
measures to improve its anti-money laundering (“AML”) program.
Beginning in the fall of 2012, for example, Alpine arranged for
an annual audit of its AML program and created standard
operating procedures for compliance with AML regulations.
Roughly two-thirds of the SARs that the SEC contends
Alpine filed with deficient narrative sections were filed before
September 28, 2012, the date on which Alpine received the FINRA
Report.
Alpine’s faulty practices, however, continued well
beyond that date.
Roughly one-third of the SARs at issue in
this action were filed after October 1, 2012, including in 2013,
2014, and 2015.
The December Opinion granted summary judgment
on hundreds of separate violations of Section 1023.320 that
occurred in both 2013 and 2014, many of which were the failure
9
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to file a SAR when Alpine had the obligation to do so.
The SEC
identified comparatively few violations that occurred during the
year 2015.
There is a snapshot of Alpine’s practices as they existed
about two years after the FINRA exit interview in July 2012.
In
July 2014, the SEC Office of Compliance Inspections and
Examinations (“OCIE”) conducted a one-week on-site review of
Alpine’s compliance practices.
The OCIE Report reviewed 252 of
the over 4,600 SARs filed by Alpine between January 2013 and
July 2014.
On April 9, 2015, OCIE issued a report (“OCIE
Report”) strongly critical of Alpine.
The OCIE Report found that 50% of the 252 SARs “failed to
completely and accurately disclose key information of which
[Alpine] was aware at the time of filing.”
It concluded that
Alpine’s SAR “narratives generally contained ‘boilerplate’
language and very little -- if any -- specific and material
information that Alpine identified in its investigations of the
matters.”
It criticized Alpine for omitting mention of many red
flags for suspicious activity, such as a customer’s civil,
regulatory, or criminal history; foreign involvement with the
transactions; concerns about an issuer; stock promotion
activity; or that an issuer had been a shell company.
According
to the OCIE Report, Alpine’s failure to disclose key information
“rendered the SARs less valuable to investigators trying to
10
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understand the activity and any criminal or administrative
implications thereof.”
The OCIE report described Alpine’s conduct as “recidivist
activity” (emphasis in original) since it persisted
notwithstanding the 2012 FINRA examination.
The OCIE Report
concluded that Alpine’s compliance practices violated Rule 17a-8
and “obscured the true nature of the suspicious activity.”
It
further concluded that many of Alpine’s SARs appeared to
indicate that Alpine was “intentionally trying to obfuscate or
distort the truly suspicious nature of the activity that
[Alpine] is required to report to law enforcement.”
These
conclusions are entirely consistent with the Court’s own
assessment based on its review of materials submitted by the
parties in connection with the summary judgment motions.
The SEC’s Action Against Alpine
The SEC filed this action against Alpine on June 5, 2017.
Its complaint alleged violations of Rule 17a-8 during a period
of May 17, 2011 through December 31, 2015.
As invited by the
Court, the SEC moved for partial summary judgment based on
exemplar SARs in each of four categories that it alleged
revealed violations of Rule 17a-8. 11
See March Opinion, 308 F.
Alpine declined to submit exemplars to assist in the
development of the legal framework that would govern this
action. December Opinion, 354 F. Supp. 3d at 405.
11
11
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Supp. 3d at 781.
Relying on the guidance given in the March Opinion
regarding the legal standards that would be applied in this
action, the SEC thereafter moved for summary judgment as to
Alpine’s liability for several thousand individual violations of
Rule 17a-8.
The SEC’s motion focused on four categories of
deficiencies in Alpine’s compliance with SAR reporting
requirements: (i) filing SARs with deficient narratives
(“Deficient Narrative SARs”), (ii) failing to file SARs
reflecting sales that followed large deposits of LPS (“Failure
to Report Violations”), (iii) filing SARs long after the
transactions were completed (“Late-Filed SARs”), 12 and (iv)
failing to maintain and produce support files for SARs (“Support
Files Violations”).
The December Opinion granted in part the
SEC’s motion for summary judgment, finding thousands of
violations of Rule 17a-8 based on Alpine’s Deficient Narrative
SARs, Failure to Report Violations, and Support Files
Violations.
354 F. Supp. 3d at 422-45.
The findings in the December Opinion are highly relevant to
The December Opinion denied summary judgment as to this
category because the SEC did not show that Alpine had an
obligation to file these SARs. To show that Alpine had an
obligation to file the SARs, the SEC had relied exclusively on
the fact that FINRA had ordered Alpine to file the SARs. See
December Opinion, 354 F. Supp. 3d at 443.
12
12
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this decision on penalties.
While those findings are
incorporated by reference and will not be repeated here, the
granularity of the findings and the extent to which they reveal
how widespread the deficiencies were in Alpine’s SAR-filing
system bear emphasis.
The December Opinion is significant as well for the
determination of penalties because it is a decision rendered on
a summary judgment motion.
It reflects an extremely
conservative finding regarding the extent of Alpine’s disregard
of its legal obligations.
In identifying those circumstances in
which there could be no factual dispute regarding Alpine’s
failure to abide by those legal obligations, the December
Opinion relied on a narrow set of measurements.
suffice.
A few examples
Although the SEC had argued that SARs were deficient
for failing to include information that there was a history of
stock promotion activity in connection with deposited LPS up to
eighteen months before the SAR was filed, the December Opinion
granted summary judgment only for those SARs that failed to
report stock promotion activity that occurred within six months
of a substantial deposit of LPS.
Id. at 433.
Similarly, the
SEC sought summary judgment for SARs that failed to disclose the
comparatively low trading volume in deposited LPS where the
deposit represented at least three times the average daily
trading volume of the stock when measured over the three months
13
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preceding the deposit.
The December Opinion granted summary
judgment only where the ratio between the shares deposited in a
single transaction was at least twenty times the average daily
trading volume over the three-month period prior to the deposit.
Id. at 437.
As a final example, while Alpine may have had a
duty to file as many as 3,568 SARs to report the liquidations
that followed the deposit of a large number of shares of LPS,
the December Opinion adopted a conservative measure and found
only 1,218 violations. 13
Id. at 441.
Using such conservative
measures, summary judgment was entered for over 2,200 SARrelated violations. 14
The SEC asserted that Alpine had a duty to file a SAR
reflecting certain patterns of sales that followed a large
deposit of LPS. The SEC identified 1,242 deposit-andliquidation groups, which together include 3,568 individual
sales of shares worth $5,000 or more. Although the liquidation
of a deposit of a large number of shares of LPS is a hallmark of
market manipulation, Alpine had filed no SARs for those sales.
December Opinion, 354 F. Supp. 3d at 441.
13
In opposition to the SEC’s request for remedies, Alpine
defends its actions by arguing that the law’s requirements were
less than clear. As explained in the March Opinion, however,
the standards governing Alpine’s SAR obligations are clearly
established by Section 1023.320, the SAR Forms, and FinCEN
guidance documents. See March Opinion, 308 F. Supp. 3d at 78995. Moreover, Alpine was warned of violations of its SAR
obligations as early as July 23, 2012, when FINRA conducted an
exit meeting concerning the deficiencies in Alpine’s AML program
and the SARs it had filed. To the extent Alpine relies in part
on the December Opinion’s refusal to grant summary judgment for
all of the SARs at issue, Alpine’s argument mistakes the summary
judgment standard, which seeks only to identify material,
disputed issues of fact, with a verdict at trial, which
determines whether a violation occurred by resolving those
14
14
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The December Opinion also revealed in other ways the risks
to market integrity represented by Alpine’s decision to ignore
its regulatory obligations.
For instance, in establishing that
Alpine had a legal duty to file the SARs that the SEC asserted
had been filed with a deficient narrative section, the SEC
identified six red flags which triggered a broker-dealer’s duty
to file a SAR.
These red flags were derived from the SAR Form
and its instructions as well as FinCEN and other guidance
interpreting Section 1023.320.
The red flags “take into account
the unique characteristics of the LPS markets such as the
difficulty in obtaining objective information about issuers, the
risk of abuse by undisclosed insiders, and the opportunity for
market manipulation schemes.”
The six red flags are:
Id. at 425-26.
(1) the existence of any related
litigation; (2) the issuer’s status as a shell company or a
history of derogatory information regarding the issuer; (3) a
history of stock promotion in connection with the LPS being
deposited; (4) the existence of an unverified issuer, e.g., an
issuer with an expired business license or nonfunctioning
website; (5) a comparatively low average daily trading volume
factual disputes. Alpine has not identified any uncertainty in
the law that excused its violations, as found in the December
Opinion. Had there been a finding of additional violations at
trial, it is highly doubtful that Alpine would have been able to
do so at that time either.
15
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compared to the amount of stock being deposited in a single
transaction; and (6) involvement in the transaction by a foreign
entity or individual.
Id. at 425-39.
Alpine admitted, with one
exception, that the red flags identified by the SEC required
Alpine to investigate the transaction to determine whether a SAR
had to be filed.
Id. at 426.
These red flags existed in
thousands of transactions at issue in the motion.
Frequently
there were multiple red flags for a single transaction.
The March and December Opinions also illuminate the extent
to which Alpine has continued right up until today to deny that
it had a deficient SAR-filing regime.
For example, it took the
extreme position in this litigation that its filing of a SAR
could not be taken as an admission that it had any duty to file
a SAR in connection with the transaction.
It argued that the
SEC had to independently show that Alpine had such a duty to
file a SAR for each transaction because Alpine’s filings were
simply “voluntary” filings as opposed to filings made pursuant
to the law’s mandates to alert regulators to suspicious trading
activity.
March Opinion, 308 F. Supp. 3d at 799 & n.20.
One more example is useful to illustrate Alpine’s continued
resistance to its legal obligations.
In opposition to summary
judgment Alpine argued that, even if it was required to file a
SAR, it did not have to disclose the existence of a red flag in
the SAR’s narrative section.
This argument was rejected for
16
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several reasons.
December Opinion, 354 F. Supp. 3d at 426.
Among those reasons was the substance of the SARs themselves.
Nearly all of Alpine’s SARs used “template narratives that
failed to include any details, positive or negative, about the
transactions.”
Id.
The December Opinion found that, while a
fulsome SAR narrative could have presented a question of fact as
to whether it also should have included a discussion of the red
flags in the SAR narratives, “except in rare instances Alpine
has not shown that its SAR narratives contained sufficient
information to create [such] a question of fact.”
Id.
After the December Opinion was issued, a conference on
April 12 and an Order of April 30, 2019 resolved all remaining
disputes on that Opinion’s findings.
As the parties now agree,
the December Opinion granted summary judgment as to 2,720
violations comprising 1,010 Deficient Narrative SARs, 1,214
Failure to Report Violations, and 496 Support Files Violations.
The SEC has decided to forgo trial on the remainder of the
alleged violations of Rule 17a-8.
Its motion for remedies was
filed on May 3 and became fully submitted on July 11.
Discussion
“Once the district court has found federal securities law
violations, it has broad equitable power to fashion appropriate
remedies.”
SEC v. Frohling, 851 F.3d 132, 138 (2d Cir. 2016)
17
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(citation omitted).
These remedies may include both civil
penalties and injunctive relief.
I.
Id.
Civil Penalties
Section 21(d)(3) of the Exchange Act authorizes an award of
civil penalties “for both deterrent and punitive purposes.”
at 139; see also 15 U.S.C. § 78u(d)(3)(A).
Id.
Pursuant to Section
21(d)(3), three tiers of civil penalties may be imposed.
Id.
[A] first-tier penalty may be imposed for any
violation; a second-tier penalty may be imposed if the
violation involved fraud, deceit, manipulation, or
deliberate or reckless disregard of a regulatory
requirement; a third-tier penalty may be imposed when,
in addition to meeting the requirements of the second
tier, the violation directly or indirectly resulted in
substantial losses or created a significant risk of
substantial losses to other persons.
SEC v. Razmilovic, 738 F.3d 14, 38 (2d Cir. 2013) (citation
omitted).
“[F]or each violation” within each tier, “the amount
of the penalty shall not exceed the greater of a specified
monetary amount or the defendant’s gross pecuniary gain.”
Id.
(citation omitted).
As modified by the Debt Collection Improvement Act of 1996
and corresponding SEC regulations, the maximum amounts specified
for non-natural persons are as follows.
For each violation
occurring between March 4, 2009 and March 5, 2013, the maximum
amount specified is $75,000 at tier one, $375,000 at tier two,
and $725,000 at tier three.
15 U.S.C. § 78u(d)(3)(B); Exchange
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Act Release No. 34-59449, Feb. 25, 2009 (effective Mar. 3,
2009); 17 C.F.R. § 201.1001; Table I to 17 C.F.R. § 201.1001. 15
For each violation occurring between March 6, 2013 and November
2, 2015, these amounts increase to $80,000, $400,000, and
$775,000, respectively.
17 C.F.R. § 201.1001; Table I to 17
C.F.R. § 201.1001.
Beyond these restrictions, the amount of the penalty is
within “the discretion of the district court,” Razmilovic, 738
F.3d at 38 (citation omitted), and should be determined “in
light of the facts and circumstances” surrounding the
violations.
15 U.S.C. § 78u(d)(3).
In determining the proper
amount for a civil penalty, courts in this district have looked
to a number of factors, including
(1) the egregiousness of the defendant’s conduct; (2)
the degree of the defendant’s scienter; (3) whether
the defendant’s conduct created substantial losses or
the risk of substantial losses to other persons; (4)
whether the defendant’s conduct was isolated or
recurrent; and (5) whether the penalty should be
reduced due to the defendant’s demonstrated current
and future financial condition.
SEC v. Haligiannis, 470 F. Supp. 2d 373, 386 (S.D.N.Y. 2007);
see also SEC v. Cope, No. 14cv7575(DLC), 2018 WL 3628899, at *6
(S.D.N.Y. July 30, 2018) (same); SEC v. Tavella, 77 F. Supp. 3d
353, 362-63 (S.D.N.Y. 2015) (same).
The Haligiannis factors
Table I to 17 C.F.R. § 201.1001 was previously found at 17
C.F.R. § 201.1004 and Table IV to Subpart E of Part 201.
15
19
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“are not to be taken as talismanic.”
F.3d 36, 45 (2d Cir. 2019).
SEC v. Rajaratnam, 918
It is appropriate to consider as
well factors such as a defendant’s financial condition, id., a
defendant’s failure to admit wrongdoing, SEC v. Alt. Green
Techs., Inc., No. 11cv9056(SAS), 2014 WL 7146032, at *4
(S.D.N.Y. Dec. 15, 2014), and a defendant’s lack of cooperation
with authorities.
SEC v. Cavanagh, No. 98cv1818(DLC), 2004 WL
1594818, at *31 (S.D.N.Y. July 16, 2004); see also SEC v.
Lybrand, 281 F. Supp. 2d 726, 730 (S.D.N.Y. 2003).
The
“brazenness, scope, and duration” of illegal conduct may warrant
“a significant penalty.”
Rajaratnam, 918 F.3d at 45.
The SEC seeks civil penalties in the amount of $10,000 for
each Deficient Narrative SAR and Failure to Report Violation.
It seeks a penalty of $1,000 for each Support File Violation.
Combined, it requests a total civil penalty of $22,736,000.
Examining the first Haligiannis factor, it is easy to find
that Alpine’s misconduct was egregious.
It has not just been
found liable, it has been found liable for illegal conduct on a
massive scale.
The breadth and regularity of Alpine’s
violations of Rule 17a-8 warrant a substantial civil penalty.
As described in the December Opinion, the SEC met its
burden to prove on summary judgment 2,720 separate violations of
Rule 17a-8 premised on thousands of deficient narratives in the
SARs it filed, its failure to report the massive sell-offs of
20
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large deposits of LPS, and Alpine’s failure to produce hundreds
of support files as required by Section 1023.320. 16
Although
each of the 1,010 Deficient Narrative SARs has been counted as
only a single violation of Rule 17a-8 for the purposes of
summary judgment, over half of the SARs to which the December
Opinion granted summary judgment contained multiple deficiencies
-- any one of which would have been sufficient to justify a
civil penalty.
December Opinion, 354 F. Supp. 3d at 420.
Alpine’s SARs omitted references to multiple red flags
indicative of suspicious activity and failed to disclose
transaction sequences that reflected “a hallmark of market
manipulation.”
Id. at 441.
In a large number of instances,
Alpine failed to include information in the SAR narratives that
the SAR Form itself specifically directs a broker-dealer to
include.
The next factor to be considered in assessing a penalty is
the degree of Alpine’s scienter.
Although a finding of scienter
is not required to impose the tier-one penalty sought by the
Section 1023.320 requires both the maintenance of records for
five years after a SAR is filed and the production of records at
the request of a federal regulatory agency such as the SEC. See
March Opinion, 308 F. Supp. 3d at 811-12. In connection with
its motion for summary judgment, the SEC submitted evidence that
Alpine failed to produce support files for 496 SARs when
requested by the SEC in 2016. See December Opinion, 354 F.
Supp. 3d at 444.
16
21
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SEC, the evidence supports a finding that Alpine acted knowingly
and with disregard for its obligations under the law. 17
As a
threshold matter, the scale and duration of Alpine’s violations
of Rule 17a-8 undermine Alpine’s assertion that its conduct was,
at worst, merely negligent.
Alpine’s violations were systemic
and enduring, occurring over a course of years and involving
conduct that was plainly in violation of federal law reporting
requirements.
Moreover, Alpine was aware of the nature and
extent of its SAR violations at least as early as July 23, 2012,
when FINRA conducted an exit meeting with Alpine to discuss
findings later summarized in the FINRA Report. 18
Although Alpine
took some steps to improve its AML compliance practices, it
continued to resist regulators’ demands to fully comply with its
SAR obligations.
Based on Alpine’s persistent failure to file
substantively adequate SARs, the 2014 OCIE Report concluded that
Alpine disputes that it acted willfully or recklessly. Alpine
recites its history of improving compliance and asserts that it
acted with diligence and in good faith. It asserts that before
any finding can be made that it was willful or reckless, Alpine
must conduct discovery and a hearing must be held. Alpine has
access to its own employees; it has not explained what
additional discovery would achieve. Nor is a hearing on its
scienter necessary. The Court has considered Alpine’s arguments
and evidence submitted in opposition to this motion. See SEC v.
Koenig, 469 F.2d 198, 202 (2d Cir. 1972).
17
Almost two years earlier, Alpine’s affiliate SCA, which was
the introducing broker for many of the transactions at issue
here, was charged with similar violations of SAR regulations.
18
22
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Alpine was “intentionally trying to obfuscate or distort the
truly suspicious nature of the activity that [Alpine] is
required to report to law enforcement.”
Alpine’s failure to acknowledge its wrongdoing throughout
this litigation provides further evidence that it acted with
scienter.
That failure also independently counsels in favor of
a substantial civil penalty.
As described in the March and
December Opinions, a principal defense asserted by Alpine -aside from its jurisdictional arguments -- has been that Alpine
had no duty to file the thousands of SARs that have been the
focus of this litigation.
See March Opinion, 308 F. Supp. 3d at
782, 799-800; December Opinion, 354 F. Supp. 3d at 422-425.
It
has asserted this defense even with respect to SARs that it did
file, claiming that they were simply “voluntary” filings and not
mandatory filings.
Alpine has maintained this position
notwithstanding warnings from FINRA and OCIE and despite
Opinions of this Court ruling otherwise.
Moreover, Alpine has
failed to produce credible evidence of a good faith belief that
it had no obligation to file the SARs it did file.
As explained
in the December Opinion,
Alpine has not identified any means by which a
regulator or a fact-finder could identify such a
“voluntary” SAR. It has not pointed to any disclosure
in the 1,593 SARs that they were “voluntary” filings.
Nor has it pointed to any portion of the SAR’s support
file reflecting an analysis of the reporting
obligation and a conclusion that the SAR was not
23
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required to be filed. Alpine’s vague and conclusory
assertion is insufficient to raise a triable question
of fact as to whether any SAR was filed voluntarily as
opposed to pursuant to Alpine’s obligation under the
law to make the filing.
December Opinion, 354 F. Supp. 3d at 423 n.44.
As for the next factor, Alpine’s contempt for the SAR
reporting regime increased the risk to investors that they would
suffer substantial losses.
Alpine’s violations prevented
regulators from obtaining information necessary to timely
investigate and squelch fraudulent and abusive trading
practices.
The missing information included derogatory
information about a stock’s issuer or the Alpine customer, the
use of shell companies, or the price, volume, and timing of
suspicious transactions.
As the OCIE Report concluded, Alpine’s
failure to adequately and accurately describe the nature of
suspicious activity in its SARs “rendered the SARs less valuable
to investigators” and impeded their ability to understand the
suspicious activity and its criminal or administrative
implications.
Given the sheer scale of Alpine’s violations and
the risk of fraud inherent in the LPS markets, Alpine’s
violations of Rule 17a-8 risked substantial losses to investors
in those markets.
As for the fourth factor, and as already discussed,
Alpine’s misconduct was not isolated; it was recurrent.
Alpine’s violations of Rule 17a-8 occurred over the course of
24
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years.
The SEC’s complaint and this litigation have focused on
Alpine’s practices in filing and neglecting to file SARs, and in
refusing to produce SAR-related files, during the period 2011 to
2015.
Alpine disregarded its legal obligations regarding SARs
throughout this period.
The deficiencies persisted
notwithstanding an intensive examination by FINRA in 2011 and a
highly critical FINRA Report issued in 2012.
Although the
extraordinary scale of Alpine’s violations decreased over the
years, the violations did not cease.
As reflected in the 2014 OCIE Report, Alpine never adopted
a satisfactory SAR compliance program during the period examined
in this litigation.
As the OCIE Report emphasized, Alpine’s
SARs remained woefully deficient even years after the FINRA
Report issued.
It reported that over 50% of the SARs OCIE
reviewed omitted reference to suspicious activity of which
Alpine knew at the time the SAR was filed.
It further stated
that “the amount and type of actual material information in SARs
filed by Alpine is very similar to the sample SAR that FinCEN
has identified in its public guidance as being insufficient or
incomplete.”
The examination of individual SARs undertaken
during the summary judgment process confirmed that finding.
The final Haligiannis factor is whether a penalty should be
reduced due to Alpine’s demonstrated current and future
financial condition.
In fiscal year 2018, Alpine’s annual
25
Case 1:17-cv-04179-DLC Document 235 Filed 09/26/19 Page 26 of 36
revenue was roughly
.
capital of
It currently has excess net
; it generally maintains an average of
approximately
in excess net capital.
business is highly profitable.
Alpine’s
From 2014 to May 2019, its owner
withdrew over $31 million of Alpine’s equity.
Over $8 million
of this amount was withdrawn from capital in 2014 alone. 19
An additional factor that is relevant here is Alpine’s
failure to admit wrongdoing and its lack of cooperation with
authorities.
Much of the evidence relevant to this factor has
been discussed as indicative of Alpine’s scienter.
Nonetheless,
it bears emphasis that at no step of this eight-year saga has
Alpine forthrightly confronted the glaring deficiencies in its
SAR reporting regime.
When new ownership took over Alpine in
early 2011 it did so without putting in place a competent
compliance system.
While Alpine did upgrade its AML capability
following the FINRA examination, it did not use the FINRA
On July 22, 2019, Alpine filed a motion to strike portions of
the SEC’s brief to the extent it suggested that “the financial
condition of Alpine’s ‘ownership’ must be taken into account in
determining an appropriate penalty.” Alpine’s July 22 motion to
strike, and its alternative request for leave to file a surreply, is denied. The financial condition of Alpine’s ownership
is not relevant to this motion and no discovery is needed
regarding its ownership’s “ability to pay.” The figures
describing withdrawals by Alpine’s ownership are relevant
evidence of the financial condition of Alpine. There is no
dispute as to the figures, which are contained in Alpine’s
reports.
19
26
Case 1:17-cv-04179-DLC Document 235 Filed 09/26/19 Page 27 of 36
examination and the substantial guidance in the FINRA Report as
an opportunity to admit its deficiencies and to thoroughly
reform its practices to bring them into compliance with the law.
Thus, the 2014 OCIE examination revealed that Alpine was still
using boilerplate language in its SAR narratives, omitting
critical information from its SARs, and acting to “obscure[] the
true nature” of the suspicious activity it was assisting as a
broker-dealer.
Moreover, in response to the OCIE Report, Alpine
repeated many of the same specious defenses that it had
previously asserted during the course of the FINRA examination.
In a letter of May 20, 2015, Alpine disputed each of OCIE’s
findings point by point, arguing that its SARs should be
considered in the nature of an “alternative, voluntary filing
process” and that “the process for determining whether activity
is suspicious is a subjective one.”
Alpine’s lack of remorse and denial of wrongdoing has
persisted to this day. 20
Confronted with this lawsuit, Alpine
did not admit that any of its SAR filings were deficient or that
In opposition to this motion for remedies, Alpine argues that
it acted in good faith in not filing SARs when its customers
liquidated substantial deposits of LPS because Alpine “assumed”
every deposit would be sold and therefore it was sufficient to
merely report the deposit. This attitude and argument reflect,
at best, a poor understanding of the SAR reporting regime and
the risks to the market when suspicious liquidations are not
timely reported to regulators.
20
27
Case 1:17-cv-04179-DLC Document 235 Filed 09/26/19 Page 28 of 36
it had a duty to file more SARs than it had filed.
It even
argued that it had no duty to file the SARs that it did file.
Without any evidentiary support, and in the face of overwhelming
evidence to the contrary, it asserted that its SARs were
“voluntary” filings and denied that they had been filed because
of any legal duty to do so. 21
As noted above, the SEC seeks a civil penalty of
$22,736,000.
Alpine opposes the imposition of a civil penalty
of this magnitude on several grounds.
It suggests instead that
a penalty in the range of $80,000 to $720,000, combined with
certain undertakings to improve its compliance practices, would
be sufficient to satisfy the punitive and deterrent purposes of
the civil remedies provisions of the Exchange Act.
It would
not.
First, Alpine asserts that the penalty the SEC seeks is a
corporate death penalty.
While the SEC’s requested penalty is
large, so is the misconduct that prompts it.
Alpine’s financial
records indicate that the application of three years or so of
its profits would suffice to pay the penalty the SEC requests.
Since the SEC has established that Alpine’s systematic and
Alpine has also disputed throughout this litigation that the
SEC has enforcement authority over the SAR violations asserted
here. Whatever one might think of the legal merits of that
argument, Alpine does not contest generally that, as a brokerdealer, it had a duty to comply with the SAR regulations.
21
28
Case 1:17-cv-04179-DLC Document 235 Filed 09/26/19 Page 29 of 36
widespread evasion of the law lasted more than three years, this
benchmark does not suggest that the SEC’s request is out of sync
with the magnitude of the violations shown.
Next, Alpine asserts that the penalty should not be set by
the number of individual violations on which the SEC was granted
summary judgment, but by some other less onerous method.
It
argues that the SEC is seeking to impose a staggering penalty by
separately counting each time the same type of deficiency, which
it describes as relatively few in number, affected a different
SAR.
For instance, by its calculation millions of dollars would
be assessed for failing to report in its SARs the same
customer’s involvement in an ongoing regulatory action.
It
contends as well that the penalty requested by the SEC is higher
in the aggregate than penalties imposed in other cases where
there were recurrent, multi-year violations of the SAR reporting
requirements.
While Alpine admits that almost all of the cases
to which it points were settled matters, it argues that it
should not be subject to what it terms a “litigation penalty.” 22
Thus, it suggests that, in this tier-one penalty case where the
The SEC has pointed to instances in which far larger penalties
were imposed as well. See, e.g., In re Wells Fargo Advisors,
LLC, SEC Release No. 82054, 2017 WL 5248280 (Nov. 13, 2017)
(imposing penalty of $3,500,000 for 50 unreported or untimely
SAR filings). Alpine argues that each of those cases is
distinguishable.
22
29
Case 1:17-cv-04179-DLC Document 235 Filed 09/26/19 Page 30 of 36
SEC has not shown a “high degree of scienter” or fraud or
significant victim losses, the proper measure of penalties
should be set per course of conduct, and not per SAR. 23
According to Alpine, there were three, or at most nine, courses
of conduct at issue here. 24
If coupled with prompt internal reform and a timely
admission of the deficiencies in its SAR filings, Alpine’s plea
for alternative measures of the penalty or for a penalty set at
an even more minimal level than that selected by the SEC would
have more appeal.
Alpine can point to neither.
For at least
three years after the period examined by FINRA, Alpine continued
to obfuscate suspicious activity and to avoid its duties under
the law.
The summary judgment record confirms that Alpine’s
obstruction of government oversight of the LPS market was an
Alpine also suggests that the penalty could be pegged to
disgorgement by measuring Alpine’s ill-gotten gains. If this
measurement had been pursued by the SEC, it is by no means clear
that that measure would have reduced the requested penalty.
Alpine’s business model appears to have been exceedingly
profitable and to have relied in large part on the business of a
few customers specializing in LPS whose transactions Alpine did
not properly report in SARs.
23
The three courses of conduct Alpine identifies are (1) its
Deficient Narrative SARs, (2) its Failure to Report Violations,
and (3) its Support Files Violations. The nine courses of
conduct Alpine identifies are (1)-(6) the six red flags
discussed above, (7) its failure to describe in its SARs the
“Five Essential Elements” as defined by FinCEN guidance, (8) its
Failure to Report Violations, and (9) its Support Files
Violations.
24
30
Case 1:17-cv-04179-DLC Document 235 Filed 09/26/19 Page 31 of 36
ingrained, multi-year enterprise.
Instead of undertaking the
scrutiny and reporting of individual transactions required by
law, Alpine chose to run a high-volume business in the LPS
market and use templates for many of the SARs it filed.
Even
today, in its opposition to this motion for remedies, Alpine
continues to minimize and excuse its offenses.
The SEC is entitled under the law to seek a penalty for
each separate violation of the SAR reporting obligations.
Alpine required, as it was entitled to, that the SEC separately
prove with respect to each SAR that Alpine had both a duty to
file the SAR, and, if it had filed one, that the SAR was legally
deficient.
The SEC carried that burden to the extent found in
the December Opinion.
For those individual SARs, and within the
range of penalties permitted at tier one, the SEC has selected
civil penalty amounts that fall toward to the bottom of the
range. 25
Alpine has not shown that the SEC’s request is
inappropriate or excessive based on the record recited above.
Third, Alpine asserts that any penalty imposed for its
violations of Section 17a-8 cannot exceed the penalty limits
prescribed in the BSA.
This argument is merely a reprise of
Applying the maximum penalties available for a tier-one
violation, Alpine’s 2,720 violations would result in an
aggregate penalty of more than $204,000,000. See 15 U.S.C.
§ 78u(d)(3)(B). The SEC seeks roughly 10% of that figure.
25
31
Case 1:17-cv-04179-DLC Document 235 Filed 09/26/19 Page 32 of 36
Alpine’s repeatedly rejected argument that the BSA, rather than
Rule 17a-8 and the Exchange Act, provides the governing law for
this case.
See March Opinion, 308 F. Supp. 3d at 795; SEC v.
Alpine Sec. Corp., No. 17cv4179(DLC), 2018 WL 3198889, at *2
(S.D.N.Y. June 18, 2018) (denying reconsideration of the March
Opinion); see also December Opinion, 308 F. Supp. 3d at 416-17;
SEC v. Alpine Sec. Corp., No. 17cv4179(DLC), 2019 WL 4071783, at
*2 (S.D.N.Y. Aug. 29, 2019) (denying reconsideration of the
December and March Opinions).
Although the BSA limits the
maximum civil penalty that the Secretary of the Treasury may
impose for negligent violations of Section 1023.320, see 31
U.S.C. § 5321(a)(6), the SEC brought this case and it brought it
under Section 17(a) of the Exchange Act and Rule 17a-8.
Accordingly, it is the penalty provisions of the Exchange Act,
not of the BSA, that provide the maximum civil penalty
available.
Cf. Kokesh v. SEC, 137 S. Ct. 1635, 1643 (2017)
(noting that disgorgement, one of several inherently punitive
sanctions the SEC may impose, “further[s] the Commission’s
public policy mission of protecting investors and safeguarding
the integrity of the markets”).
Finally, Alpine argues that the SEC’s requested remedy
would violate the Eighth Amendment’s prohibition against
32
Case 1:17-cv-04179-DLC Document 235 Filed 09/26/19 Page 33 of 36
excessive fines.
See U.S. Const. amend. VIII. 26
Under the
Eighth Amendment, however, a fine is unconstitutionally
excessive only if it is “grossly disproportional to the gravity
of a defendant’s offense.”
United States v. Sabhnani, 599 F.3d
215, 262 (2d Cir. 2010) (quoting United States v. Bajakajian,
524 U.S. 321, 334 (1998)); see also United States v. Viloski,
814 F.3d 104, 111 (2d Cir. 2016) (explaining that courts may
consider fine’s impact on future ability to earn a livelihood).
While courts consider numerous factors to determine whether a
particular fine is grossly disproportional, see Sabhnani, 599
F.3d at 262, the Eighth Amendment proportionality analysis is
substantially similar to the analysis required by the factors
described and considered above.
A civil penalty of $22,736,000,
while substantial, is not grossly disproportional to the gravity
of Alpine’s 2,720 violations of the federal securities laws.
Having considered the above factors, the circumstances
surrounding Alpine’s 2,720 violations of Rule 17a-8, and each of
Alpine’s arguments in opposition to the SEC’s request for
remedies, a tier-one civil penalty in the amount of $12,000,000
is assessed.
This penalty is substantial; it reflects the
seriousness of Alpine’s violations and the need for a remedy
“The Eighth Amendment protects against excessive civil fines,
including forfeitures.” Hudson v. United States, 522 U.S. 93,
103 (1997).
26
33
Case 1:17-cv-04179-DLC Document 235 Filed 09/26/19 Page 34 of 36
that is adequate to punish and deter such violations.
A
$12,000,000 penalty, however, is also a small fraction of the
maximum tier-one remedies available and substantially less than
the amount the SEC has requested. 27
While the SEC’s requested
penalty falls within the range of penalties that could
reasonably be imposed in this case, consideration of several
factors, but principally of Alpine’s financial condition, make a
penalty of $12,000,000 more appropriate.
A $12,000,000 penalty
is reasonable in light of all the facts and circumstances
described above.
II.
Permanent Injunction
In addition to civil penalties, Congress has expressly
authorized the use of injunctive relief to proscribe future
violations of the federal securities laws.
§ 17u(d)(1).
15 U.S.C.
Injunctive relief is only warranted where “there
is a substantial likelihood of future violations of illegal
securities conduct.”
SEC v. Cavanagh, 155 F.3d 129, 135 (2d
Cir. 1998); see also SEC v. Manor Nursing Centers, Inc., 458
Whereas the SEC has requested remedies of $10,000 per
Deficient Narrative SAR and Failure to Report Violation, an
aggregate penalty of $12,000,000 is roughly equivalent to a
tier-one penalty of just over $5,000 per Deficient Narrative SAR
and Failure to Report Violation, in addition to a penalty of
$1,000 per Support File Violation.
27
34
Case 1:17-cv-04179-DLC Document 235 Filed 09/26/19 Page 35 of 36
F.2d 1082, 1100 (2d Cir. 1972).
When making this determination,
courts consider:
[1] the fact that the defendant has been found liable
for illegal conduct; [2] the degree of scienter
involved; [3] whether the infraction is an isolated
occurrence; [4] whether defendant continues to
maintain that his past conduct was blameless; and [5]
whether, because of his professional occupation, the
defendant might be in a position where future
violations could be anticipated.
Cavanagh, 155 F.3d at 135 (citation omitted).
The imposition of
permanent injunctive relief is “within the court’s discretion,”
and is particularly appropriate “where a violation was founded
on systematic wrongdoing, rather than an isolated occurrence”
and where the defendant’s “persistent refusals to admit any
wrongdoing make it rather dubious that the [defendant is] likely
to avoid such violations of the securities laws in the future in
the absence of an injunction.”
Frohling, 851 F.3d at 139
(citation and emphasis omitted).
For many of the reasons already discussed, a permanent
injunction against further violations of Section 17(a) and Rule
17a-8 is warranted in this case.
The December Opinion found
Alpine liable for 2,720 violations of Rule 17a-8, which occurred
over a course of years and which persisted on a systemic basis
notwithstanding clear warnings by FINRA and OCIE.
As discussed
above, Alpine continues to maintain that many of the SARs on
which summary judgment was granted were not required to be filed
35
Case 1:17-cv-04179-DLC Document 235 Filed 09/26/19 Page 36 of 36
and to argue, in the face of clear regulatory guidance to the
contrary, that it engaged in no wrongdoing.
Alpine’s persistent
refusal to admit wrongdoing and its record of noncompliance with
SAR reporting obligations demonstrate a substantial likelihood
that Alpine will continue to violate federal securities laws in
the future.
Given its function as a broker-dealer, Alpine
remains in a position where future violations could be
anticipated.
Conclusion
The SEC’s May 3 motion for remedies is granted in part.
Alpine shall pay a civil penalty in the amount of $12,000,000.
An injunction will be entered against Alpine.
Dated:
New York, New York
September 12, 2019
____________________________
DENISE COTE
United States District Judge
36
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