Garcia Case Highlights Necessity of Knowing Your Customer and
Listening to Internal Fraud Watchdogs.
The SEC's recent Order against a
broker-dealer (the “Firm”) imposed a $750,000 financial
penalty for the Firm's failure to comply with its Customer
Identification Program (“CIP”) procedures and
appropriately respond to other “red flags” of
malfeasance, all in violation of Section 17(a) of the Exchange Act
and 17a-8 thereunder. The financial penalty was on top of the $3.3
million plus interest the Firm had already paid in restitution.
The underlying conduct, as outlined in the Order, related to an
alleged fraud perpetrated by an unlicensed investment adviser
against a municipal entity (all of which is discussed
below).1 The Order outlines how different
departments within the Firm possessed relevant information of
wrongdoing, yet this information was not shared adequately across
departmental lines. The SEC's Order reminds firms of the
importance of preventing
