Archipelago agrees to pay SEC $1.5 million after failing to file suspicious activity reports

The Securities and Exchange Commission (SEC) has taken significant action against Archipelago Trading Services Inc. (ATSI) for its failure to file Suspicious Activity Reports (SARs) related to hundreds of suspicious financial transactions executed through its alternative trading system (ATS).

The charges, spanning from August 2012 to September 2020, reflect a lapse in the company’s anti-money laundering surveillance program, raising concerns about the potential for manipulative trading activities. ATSI, a prominent Chicago-based broker-dealer specializing in over-the-counter (OTC) equity securities trading, has consented to a settlement of $1.5 million to resolve the charges.

Background and allegations

The SEC’s investigation found that ATSI, through its OTC equity securities ATS known as Global OTC, facilitated the execution of transactions primarily involving microcap and penny stock securities. These securities, characterized by their high-risk nature and absence from national exchanges, demand heightened scrutiny due to the potential for manipulation and fraud.

Despite the considerable volume of transactions on Global OTC, ATSI failed to establish an anti-money laundering surveillance program until September 2020.

The SEC’s order outlines that ATSI’s oversight shortcomings led to the failure to identify potential red flags associated with manipulative trading activities. These activities include practices like spoofing, layering, wash trading, and pre-arranged trading, which are all considered illicit and potentially harmful to market integrity.

This oversight resulted in ATSI’s failure to file a substantial number of SARs—specifically, at least 461 reports, most of which pertained to microcap or penny stock securities transactions.

Adequate AML surveillance is crucial

In response to ATSI’s failures, the SEC announced charges against the company, alleging violations of Section 17(a) of the Securities Exchange Act and Rule 17a-8. Without admitting or denying these findings, ATSI chose to settle the matter with the SEC. The terms of the settlement include a censure and a cease-and-desist order, in addition to the payment of a $1.5 million penalty.

The case against ATSI underscores the essential role that anti-money laundering (AML) compliance plays in maintaining the integrity of financial markets. The Bank Secrecy Act mandates that SEC-registered broker-dealers are responsible for filing SARs to flag suspicious financial activities that could be indicative of money laundering or other illicit activities. These reports serve as an essential tool in preventing financial crimes and ensuring that investors and market participants are safeguarded against potential risks.

Daniel R. Gregus, Director of the SEC’s Chicago Regional Office, emphasized that all SEC-registered broker-dealers are obligated to uphold the Bank Secrecy Act’s requirements. Failure to investigate and report red flags, particularly those associated with high-risk securities like microcap and penny stocks, can put the investing public at risk. The charges against ATSI serve as a reminder that adequate AML surveillance is crucial in maintaining the trust and integrity of the financial markets.

The SEC’s charges against Archipelago Trading Services Inc. highlight the significance of robust anti-money laundering surveillance programs within the financial industry. Failing to file Suspicious Activity Reports can lead to potential risks for investors and the integrity of the market as a whole.

The settlement’s terms, including the $1.5 million penalty, underscore the importance of regulatory compliance and vigilance in identifying and reporting suspicious financial transactions. As financial markets continue to evolve, maintaining stringent AML practices remains an essential component of preserving market integrity and investor confidence.