FINRA Sanctions CCO/AMLCO Over Microcap Red Flags And Private Placement Disclosures

July 21, 2021

In a recent regulatory settlement, FINRA patiently presents its case -- and does so in compelling fashion. At issue is the supervision of a member firm's anti-money laundering compliance program and of the marketing of two private placements. FINRA alleges that the firm's CCO/AMLCO came up short. Based upon the allegations in the AWC, FINRA made its case and in a very thorough fashion. An excellent read for industry professionals.

Case in Point

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Luis Fernando Restrepo submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Luis Fernando Restrepo, Respondent (FINRA AWC 2016047624501)

The AWC asserts that Luis Fernando Restrepo was first registered in 1991, and from April 2016 through October 2018, he was registered with FINRA member firm Fusion Analytics Securities, LLC, where he served as the firm's Chief Compliance Officer ("CCO") and Anti-Money Laundering Compliance Officer ("AMLCO"). The AWC asserts that Restrepo "does not have any relevant disciplinary history."

AML and Private Placement Supervisory Lapses

The "Overview" portion of the AWC alleges:

From April 2016, through March 2018, in his capacity as Fusion's AMLCO, Restrepo failed to reasonably establish and implement (i) an anti-money laundering (AML) compliance program reasonably designed to detect and cause the reporting of suspicious activity and (ii) a reasonably designed Customer Identification Program (CIP). As a result, Restrepo violated FINRA Rules 3310(a) and (b) and 2010. For calendar year 2016, Restrepo also failed to ensure that the firm conducted an annual independent test of its AML program. As a result, Restrepo violated FINRA Rules 3310(c) and 2010. 

During the period April 2016, through March 2018, Restrepo also failed to reasonably establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with Section 5 of the Securities Act of 1933. As a result, Restrepo violated FINRA Rules 3110(a) and (b) and 2010. 

Restrepo was the principal responsible for supervising private placements and reviewing correspondence. During the period of January 2017, until June 2018, Restrepo failed to reasonably supervise two private placements sold by Fusion in which Fusion failed to conduct and document reasonable investigations of the offerings and their issuers before recommending those securities to its customers. In addition, in connection with one of the private placements, Registered Representatives I and 2, who were associated with Fusion, employed, used, and made materially misleading statements in the sale of private placements. These registered representatives also relied on and distributed sales materials that were not balanced and that failed to disclose the risks associated with the investments. Restrepo was aware of multiple red flags of potential misrepresentations in offering materials distributed by Representatives I and 2 but did not reasonably investigate those red flags or otherwise take meaningful action to stop the misconduct. By reason of the foregoing, Restrepo violated FINRA Rules 3110(a) and (b) and 2010.  

at Page 2 of the AWC

AML Supervision

The AWC alleges that during the relevant period of April 2016 through March 2018 (essentially the term of Restrepo's association with Fusion but for the final months of his employment through October 2018), that:

[F]usion's customers deposited and liquidated approximately 31 million shares of microcap securities, resulting in net proceeds of approximately $20 million. Liquidations of microcap securities represented approximately 88% of all securities liquidations at the firm, and sales of microcap securities represented approximately 26% of all sales proceeds at the firm during that time.

at Page 2 of the AWC 

The above context is important to our developing understanding of FINRA's case because it presents the nature of Fusion's business, which better positions the importance of Restrepo's role as both the firm's CCO and AMLCO. The AWC cites allegedly inadequate written supervisory procedures ("WSPs") as constituting a failure by Restrepo to comply with FINRA Rules 3310: Anti-Money Laundering Compliance Program, which, in part requires that a member firm:

(a) Establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under 31 U.S.C. 5318(g) and the implementing regulations thereunder;

(b) Establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act and the implementing regulations thereunder; . . .

Red Flags Waving

In developing its case, FINRA notes the significant nature of Fusion's microcap busines:

[R]estrepo failed to reasonably tailor Fusion's AML procedures to this business and failed to reasonably detect and investigate known red flags of suspicious activity associated with those transactions. Restrepo also failed to establish and implement a reasonably designed CIP tailored to the firm's microcap stock business and its customer base. 

at Page 3 of the AWC 

Beware of Foreign Investors Bearing Gifts

As to how Restrepo's alleged failure to implement acceptable AML procedures manifested itself, in part the AWC alleges that:

Restrepo's failure caused the firm to fail to detect and report potentially suspicious trading activity. For example, during the relevant period, one broker team opened accounts for approximately eight foreign individuals who deposited blocks of stock of the same issuer, which they received as "gifts." Many of the customers then liquidated the shares and immediately transferred out the sales proceeds. Restrepo did not identify the deposits and liquidations as red flags and took no steps to determine whether the accounts should be identified as "higher risk."

at Page 4 of the AWC 

Misplaced Reliance

When FINRA scrutinized Fusion's WSPs to see how they furthered the firm's oversight of certain microcap transactions that raised red flags, the regulator purportedly discovered in part that:

Under the firm's WSPs, when a customer sought to resell a block of a little-known security or deposit unregistered securities or large blocks of microcap stocks, the registered representative was required to make inquiries to determine whether the resale may be illegal and get a completed Deposit Securities/Resale Request Questionnaire (DSRQ) from the customer. The broker on the account and Restrepo, the designated principal, were tasked with reviewing the DSRQ and raising any concerns or suspicions o the CCO and AMLCO (Restrepo). Without any system to verify the accuracy of the materials customers provided to the firm, Restrepo relied solely on the brokers to review DSRQs and the supporting materials their customers submitted. Restrepo failed to implement any reasonable system to verify whether securities being deposited were restricted or free trading. As a result, Restrepo failed to identify certain errors and red flags, which would have been apparent upon a reasonable review of the documentation on its face.

at Pages 5 - 6 of the AWC

Private Placements 

The AWC alleges that during the relevant period of January 2017 to June 2018, that Restrepo failed to reasonably supervise two private placements that commenced in January 2018 ("Offering 1") and December 2017 ("Offering 2"). Under Fusion's WSP, Restrepo was designated with supervisory responsibility for the two offerings. Clearly, the AWC expected some heightened supervision from Restrepo given that:

Prior to Restrepo's association with Fusion, Fusion and Registered Representative l sold equity in a company (OldCo) run by Promoter I and founded by his family. OldCo claimed to have developed a revolutionary new engine that was cleaner and more efficient than traditional internal combustion engines. Between 2004 and 2011, OldCo raised more than $80 million through the sale of equity in unregistered offerings. 

The SEC filed an Order Instituting Cease-and-Desist Proceedings (SEC Order) in 2013, imposing sanctions on OldCo and Promoter I. The SEC found that the unregistered offerings failed to qualify for registration exemptions and that Promoter I caused OldCo to engage in a plan to evade registration requirements by concealing the number of unaccredited investors. The SEC also found that offering materials for the sale of equity in OldCo misrepresented that investors' funds would be used only for corporate purposes. Contrary to those misrepresentations, millions of dollars were misdirected to benefit family members of Promoter I. 

OldCo has never generated any revenue from the engine design upon which it raised capital through the sale of more than $80 million of equity.

at Page 7 of the AWC

In fairness to Restrepo, he did not begin employment at Fusion until April 2016, which post-dates the events cited immediately above. To FINRA's credit, the AWC does make clear that the OldCo events transpired "[p]rior to Restrepo's association with Fusion. . ." As further explained in the AWC:

In January 2017, Promoters 1 and 2 introduced Fusion and Representative 1 to another broker-dealer (BD l) participating in Offering I. The issuer of the bonds (Issuer 1) described itself at the time as a wholly owned subsidiary of OldCo, Promoter I was among Issuer l's management and was still the president of OldCo. 

The offering was intended to raise $6 million of the necessary $7.75 million for the development of a power plant, which the Issuer I claimed would be developed with new clean energy technology patented by OldCo. Revenue from the power plant would be the 7 only source of revenue to pay the bonds. None of OldCo, Issuer I, Promoter 1, or Promoter 2 had any experience building or operating a power plant. 

Fusion participated in the offering, marketing the offering independently from BD 1. Fusion, through Registered Representatives I and 2, sold $860,000 of the bonds. 

at Pages 7 - 8 of the AWC

Frankly, OldCo's SEC regulatory history is exactly the type of issue that should have been discovered during routine due diligence and fully disclosed to potential investors. Pointedly, the AWC cites as an example of Restrepo's failed supervision that he had:

failed to take steps to ensure that the substance of the SEC Order was disclosed to investors. Both the PPM and summary document provided lengthy biographies of Promoter 1 while omitting any mention of the SEC Order. The only reference to the SEC Order came in two other documents in the Dealbox that were mixed among more mundane documents, such as certificates of formation and documentation regarding the model of engine that might be purchased or installed in the power plant. One was a memo drafted by Promoters I and 2 disputing the findings of the SEC Order and claiming that "all the remuneration cited by the SEC is justifiable." The other was a Wells submission made by Promoter 1 and OldCo denying the SEC's allegations. Nothing in any of the documents contained any description of the findings of the SEC: they contained only denials. The presentation of information concerning the SEC Order was materially misleading and would have been discovered by Restrepo had he performed a reasonable investigation. 

at Page 9 of the AWC


In accordance with the terms of the AWC, FINRA imposed upon Restrepo a six-month suspension with any FINRA member in all Principal capacities, and a requirement to requalify as a Principal. In response to Restrepo's submission of a statement of financial condition demonstrating an inability to pay, FINRA declined to impose any monetary sanctions.

Bill Singer's Comment

Compliments to FINRA on an excellent AWC replete with content and context that renders the settlement document intelligible and educative.