SEC v. J.H. Darbie & Co., Inc., No. 1:22-cv-10482, Southern District of New York (Dec. 13, 2022) — Complaint

Thomas P. Smith, Jr.
Alison Conn
Victor Suthammanont
Christine D. Ely
Suzanne Bettis*
SECURITIES AND EXCHANGE COMMISSION
New York Regional Office
100 Pearl Street, Suite 20-100
New York, New York 10004-2616
(212) 336-5674 (Suthammanont)
Email: [email protected]
*Not Admitted in SDNY
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

-- against --

J.H. DARBIE & CO., INC.,

Defendant.

22 Civ. 10482 ( )

ECF Case

COMPLAINT
AND JURY DEMAND

Plaintiff Securities and Exchange Commission (“Commission”), for its Complaint against
Defendant J.H. Darbie & Co., Inc. (“J.H. Darbie”) alleges as follows:
SUMMARY OF THE ALLEGATIONS

1. This case concerns J.H. Darbie’s failures to comply with its legal obligation to file
Suspicious Activity Reports (“SARs”) with the U.S. Treasury Department’s Financial Crimes
Enforcement Network (“FinCEN”). Between January 2018 and January 2020 (the “Relevant
Period”), J.H. Darbie, a broker-dealer registered with the Commission, generated millions of
dollars in revenue in various transaction fees from brokering more than $105 million in
transactions in low-priced securities
1
 that are traded on over-the-counter (“OTC”) markets.

1
  For purposes of this Complaint, “low-priced securities” are those priced at less than $5 per share.

2

2. The Bank Secrecy Act [codified at 31 U.S.C. §§ 5311-5314, 5316-5336 and 12
U.S.C. § 1829b, 1951-1959] (“BSA”) and its implementing regulations require broker-dealers
like J.H. Darbie to file SARs with FinCEN to report suspicious transactions conducted or
attempted by, at, or through their firms. See 31 C.F.R. § 1023.320(a)(2). FinCEN’s regulations
impose deadlines for filing SARs and impose recordkeeping requirements related to such filings.
Section 17(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 17a-8
thereunder require broker-dealers to comply with the recordkeeping, retention, and reporting
obligations of the BSA and its implementing regulations.
3. During the Relevant Period, J.H. Darbie had written anti-money laundering
policies and procedures (“AML P&P”). The AML P&P required that J.H. Darbie file a SAR
consistent with the BSA and its implementing regulations. Despite the written AML P&P, J.H.
Darbie failed to implement them in multiple ways that resulted in its failure to file SARs in
accordance with the BSA and its implementing regulations, Exchange Act Rules, as well as the
firm’s own written policies.
4. Because J.H. Darbie failed to file SARs in compliance with its legal and
regulatory obligations, J.H. Darbie deprived U.S. regulators and law enforcement of information
concerning potential wrongdoing and undermined the purposes of the BSA by allowing potential
illicit activity and actors to avoid scrutiny.
VIOLATIONS
5. By engaging in the conduct set forth in this Complaint, Defendant J.H. Darbie
violated Section 17(a) of the Exchange Act and Rule 17a-8 thereunder.

3

6. Unless Defendant is permanently restrained and enjoined, it will again engage in
the acts, practices, and courses of business set forth in this Complaint, and in acts, practices, and
courses of business of similar type and object.
NATURE OF THE PROCEEDING AND RELIEF SOUGHT
7. The Commission brings this action pursuant to the authority conferred upon it by
Sections 21(d)(1), (d)(3), and (d)(5) of the Exchange Act [15 U.S.C. §§ 78u(d)(1), (d)(3), and
(d)(5)] seeking a final judgment: (a) permanently restraining and enjoining J.H. Darbie from
engaging in the acts, practices, and courses of business alleged herein; and (b) imposing civil
monetary penalties on J.H. Darbie pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. §
78u(d)(3)].
JURISDICTION AND VENUE
8. This Court has jurisdiction over this action pursuant to Sections 21(d) and (e) and
27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78aa]. Certain of the acts, practices,
transactions, and courses of business alleged in this Complaint were effected, directly or
indirectly, by making use of means or instrumentalities of transportation or communications in
interstate commerce, or the mails, or the facilities of a national securities exchange.
9. Venue is proper in the Southern District of New York pursuant to Section 27 of
the Exchange Act [15 U.S.C. § 78aa]. Among other things, J.H. Darbie is headquartered and has
its principal place of business in New York, New York, transacts business within this district,
and certain of the acts, practices, transactions, and courses of business alleged in this Complaint
occurred within this district.

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DEFENDANT
10. J.H. Darbie is a private New York corporation with its principal place of
business in New York, New York. It has been registered with the Commission as a broker-dealer
since 1998. J.H. Darbie is subject to the requirements of the BSA. The firm has a history of
disciplinary actions against it, including actions by FINRA in 2015 and the Commission in 2018,
for failing to fulfill its regulatory obligations.
BACKGROUND ON FINCEN RULES AND FORMS
11. The BSA, as implemented in regulations promulgated by FinCEN, requires
broker-dealers to file SARs to report, among other things, a transaction (or a pattern of
transactions of which the transaction is a part) involving or aggregating to at least $5,000 that the
broker-dealer knows, suspects, or has reason to suspect: (1) involves funds derived from illegal
activity or that was conducted to disguise funds derived from illegal activity; (2) was designed to
evade any requirements of the BSA; (3) had no business or apparent lawful purpose; or (4)
involved the use of the broker-dealer to facilitate criminal activity. See 31 C.F.R. §
1023.320(a)(2).
12. FinCEN requires suspicious transactions be reported via a SAR no later than 30
calendar days after the broker-dealer detects the facts that may constitute a basis for the filing of
a SAR, subject to a 30-day extension to identify a suspect, but must report all cases within 60
days. See 31 C.F.R. §1023.320(b)(3). Some cases, such as ongoing money laundering schemes,
also require telephonic notification to law enforcement in addition to the timely filing of a SAR.
Id.
13. FinCEN also requires broker-dealers to implement and maintain a written anti-
money laundering program that complies with the requirements set forth in the FinCEN

5

regulations and the self-regulatory organization governing the broker-dealer. See 31 C.F.R. §
1023.210.
14. FINRA is the self-regulatory organization that governs J.H. Darbie.
15. FINRA Rule 3310 requires that member broker-dealers “develop and implement a
written anti-money laundering program reasonably designed to achieve and monitor the
member’s compliance with the requirements of the [BSA], and the implementing regulations
promulgated by the Department of the Treasury.”
FACTS
A. J.H. Darbie’s Written AML Policies and Procedures
16. During the Relevant Period, J.H. Darbie’s AML P&P required the firm to file a
SAR consistent with the BSA and FinCEN regulations as described above.
17. In addition, the AML P&P identified certain suspicious activity or “red flags” that
were to be reported to the AML Compliance Officer for his consideration as to whether further
investigation and a SAR filing were necessary. As relevant here, the AML P&P enumerated red
flags associated with illicit conduct in connection with the trading of low-priced securities.
18. The red flags enumerated in the AML P&P are consistent with common patterns
in illicit low-priced securities schemes such as illegal unregistered offerings and pump-and-dump
schemes in which the perpetrators will engage in touts of the stock and/or manipulative trading
to raise the price and/or trading volume of the security before selling their shares to the public.
Once the perpetrators complete the liquidation of their shares, they typically cease the
manipulative efforts and the price of the security collapses.
19. For example, the AML P&P identified as a red flag transactions involving issuers
with frequent name changes or rapidly changing business lines. One common pattern in illicit

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low-priced-securities schemes is that perpetrators will take control of an existing publicly traded
issuer of low-priced securities and change the name of the company and purported business prior
to performing an illegal unregistered offering or pump-and-dump scheme.
20. The AML P&P also identified the presence of stock promotional activities before
or during the liquidation period (i.e., when the securities were being sold) as a red flag. As noted
above, promotional campaigns designed to increase investors’ interest in a particular low-priced
security are often used by fraudsters to create a market for shares and/or to drive up the price of a
security they intend to dump into the public market for profit.
21. Another red flag identified in the AML P&P is the presence of unusual price
fluctuations (in particular price increases occurring at a time during which a J.H. Darbie client is
liquidating the low-priced securities). Unusual price fluctuations may occur in illicit schemes as
the result of promotional activities or manipulative trading.
22. The AML P&P also flagged for attention instances where investors seek to effect
multiple “rapid-fire” stock conversions aggregating to substantial amounts of the shares
outstanding or public float. Perpetrators of low-priced securities schemes often obtain the shares
they dump to the unsuspecting public through convertible debt transactions in which they acquire
purported debt of an issuer that is convertible to shares of the company. The illicit actors then
convert such debt to shares, sometimes through strawmen or co-conspirators, which they then
use for manipulative trading and/or to sell to the public.
23. J.H. Darbie’s AML P&P also identified as a suspicious practice the deposit of
low-priced securities with a broker, liquidation or sale of such securities, followed by the
withdrawal of the proceeds. This deposit, sale, and withdrawal (“DSW”) practice is common in
low-priced securities schemes, including illegal offerings.

7

24. In addition to these red flags, J.H. Darbie’s AML P&P also incorporated red flags
listed in FINRA Regulatory Notice 09-05 (Jan. 2009), which identified examples of red flags
indicating the possibility of an illegal, unregistered distribution. But the FINRA notice cautioned
that the red-flag examples were “merely illustrative” and that other situations may arise that may
signal that the broker should investigate a proposed transaction.
25. During the Relevant Period, FINRA updated its guidance to list numerous red
flags associated with securities deposits, trading, and money movement activity. See FINRA
Regulatory Notice 19-18 (May 2019). Despite a requirement in the AML P&P that they be
reviewed for possible amendment not less than annually, J.H. Darbie did not review and amend
them to include the additional suspicious activity specifically identified by FINRA in this Notice.
26. In addition to the above red flags, the AML P&P documented certain systems and
processes to monitor for and investigate potentially suspicious activity.
27. For example, the AML P&P required J.H. Darbie employees to enter information
into a “Deposit Tracking System” that would automatically flag deposits by clients that
aggregated to over 10% (“10% hits”) or 25% (“25% hits”) of the outstanding shares of the issuer
over the previous three or six months.
2
 J.H. Darbie’s AML compliance officer was responsible
for reviewing the 10% or 25% hits to identify any other red flags related to those transactions. In
addition, a senior management committee was required to review the 25% hits.
28. J.H. Darbie also designated certain securities as “Heightened Risk Securities”
(“HRS”). Compliance personnel were required by the AML P&P to investigate for stock-
promotional activity whenever these stocks were deposited or liquidated.

2
  In September 2018, J.H. Darbie revised the threshold period from six to three months.

8

29. Whenever a J.H. Darbie employee identified a transaction that potentially
required the filing of a SAR, pursuant to the AML P&P, the employee was required to
immediately report the transaction to the AML compliance officer, who was responsible for
determining whether further investigation was necessary.
30. A J.H. Darbie employee identifying such a “reportable transaction” under the
AML P&P was required to report the transaction to the AML compliance officer using a
“Suspicious Activity Referral Form.”
31. If the AML compliance officer determined to investigate suspicious activity, the
AML P&P required that either he or a trade supervisor document the investigation on a
Suspicious Activity Investigation form, including any supporting documentation.
32. If the AML compliance officer determined that an investigation was unnecessary
following a report of potentially suspicious activity, the AML P&P required that he document
that determination in a memo to be retained in the client’s file.
B. J.H. Darbie’s Failure to File Suspicious Activity Reports
33. Despite having AML P&P requiring the firm to surveil for, investigate, and report
suspicious conduct, J.H. Darbie failed to implement those written policies and procedures in
practice. The firm’s shortcomings resulted in its failure to file numerous SARs where the firm
had—at the minimum—a reason to suspect illegal activity and thus a SAR filing was required
pursuant to the BSA and its implementing regulations, Exchange Act Rules, and J.H. Darbie’s
own AML P&P.
34. J.H. Darbie accepted for deposit the low-priced securities of approximately 160
issuers reflected in approximately 1,800 deposits at one of its clearing brokers (“Broker A”), and
the further processing of approximately $105 million in net transaction proceeds to customers
through approximately 12,000 sale transactions involving 30 billion shares of such issuers

9

between January 2018 and January 2020. As outlined below, despite multiple indicia of
suspicious activity in connection with many of those transactions, the J.H. Darbie employee
primarily responsible for handing such deposits and liquidations never reported a single
transaction as potentially suspicious to the AML compliance officer.
35. Although J.H. Darbie understood, as reflected in the AML P&P, that multiple
“rapid-fire” conversions of convertible debt to shares of low-priced securities deposited to J.H.
Darbie was an indicia of suspicious activity warranting investigation, the firm did not review
every conversion and deposit of low-priced securities arising from the same debt instrument for
red flags or indicia of suspicious activity.
36. J.H. Darbie also failed to monitor for new promotional activity occurring in
connection with the conversion and deposits of low-priced securities.
37. For example, although J.H. Darbie designated certain low-priced securities as
HRS and generated reports noting the daily trade volume in such securities, it did not review
those reports together with information concerning close-in-time deposits of such securities or
withdrawals of proceeds of the trading in such securities from customer accounts. Because the
firm did not monitor the trading activity in connection with the deposit and withdrawal activity,
it failed to investigate suspicious DSW activity—an indicia of potential illegal conduct.
38. As a result, J.H. Darbie ignored or failed to investigate numerous indicia of
suspicious conduct identified in FINRA guidance and the AML P&P requiring investigation to
determine whether a SAR needed to be filed.
39. In at least 168 instances, J.H. Darbie failed to investigate or file SARs in
connection with suspicious DSW activity, specifically where a customer deposited shares of a

10

low-priced security issuer into its account, sold the shares for proceeds totaling at least $50,000,
and the same customer withdrew at least $50,000, all within 31 or fewer calendar days.
a. Specifically, while any of the deposits, sales, or withdrawals themselves may
have warranted the filing of a SAR depending on the circumstances, the
withdrawal activity in particular was suspicious in light of the deposit, sale,
and withdrawal pattern, which as described in paragraph 23 above, is common
in low-priced securities schemes, including illegal offerings.
b. In the absence of a reasonable investigation that determined the activity was
not suspicious and thus a SAR filing was not required, the withdrawals in light
of the DSW pattern in these instances should have triggered the filing of a
SAR.
40. On at least 74 occasions, one of the broker-dealer firms that cleared J.H. Darbie’s
transactions rejected a deposit of low-priced securities by a J.H. Darbie customer, but J.H.
Darbie did not conduct an investigation or file a SAR in connection with the deposits.
41. In at least 32 instances, J.H. Darbie failed to file a SAR where transactions had
two or more red flags identified in J.H. Darbie’s AML P&P. In many of these instances, J.H.
Darbie also did not investigate the transactions.
42. The following paragraphs set forth four illustrative examples of J.H. Darbie’s
failure to file SARs as required.
(i)  Transactions in the Securities of “Issuer A”
43. For example, between August 2018 and December 2019, J.H. Darbie facilitated
the deposit of more than 1.35 billion low-priced securities of “Issuer A” and the sale of more
than 1.1 billion of those securities, by two of its customers, Client 1 and Client 2.

11

44. Between October 2018 and December 2019, Client 1’s and Client 2’s deposits of
Issuer A securities generated nine 10% hits and nine additional 25% hits, requiring, according to
the AML P&P, review and approval of the deposits by the AML compliance officer or, in the
case of the 25% hits, senior management committee review.
45. In reviewing these deposits, J.H. Darbie personnel did not review the deposit in
light of liquidation or sales activity or for other indicia of suspicious activity and often copied the
approval explanation from a prior deposit.
46. But several red flags were present during the period, including (i) stock promotion
campaigns in December 2018, (ii) a 200% price increase in the value of the shares, (iii) that
Issuer A’s former CEO had been charged previously with conspiracy to commit mail, wire, and
securities fraud, (iv) that Issuer A was previously a shell company with less than $15,000 in
revenue as of its most recent Form 10-K, and (v) that Issuer A had several prior business lines
and names.
47. In addition, Client 1’s sales of Issuer A securities constituted more than 70% of
the daily trade volume on 14 days during the period, and Client 2’s sales of Issuer A securities
constituted more than 70% of the daily trade volume on 19 days during the period.
48. Despite the red flags and suspicious activity described above, J.H. Darbie did not
conduct investigations of the transactions in Issuer A, nor did it document its reasons for not
conducting such investigations.
49. As a result, J.H. Darbie failed to file SARs when it, at a minimum, had reason to
suspect that the transactions in Issuer A involved funds derived from illegal activity or involved
the use of the broker-dealer to facilitate criminal activity.

12

(ii)  Transactions in the Securities of “Issuer B”
50. Between August and November 2018, J.H. Darbie accepted the deposit and
facilitated the sale transactions of over 1.5 billion low-priced securities of “Issuer B” by Client 1
and Client 2. The 1.5 billion shares constituted nearly 70% of Issuer B’s issued and outstanding
shares as of November 30, 2018.
51. As early as July 2018, J.H. Darbie was aware or should have been aware of
multiple suspicious circumstances and red flags related to Issuer B and its securities.
52. First, Issuer B, as recently as 2016, had changed its purported business line from
an e-cigarette business to a security technology business.
53. Second, Issuer B’s most recent Form 10-K reported that the company had no
employees, no intellectual property, no revenue, total assets of $1,684, and had no expenditures
relating to research or development over the prior two fiscal years—all of which indicated that
the company was or may have been a shell issuer.
54. Third, in July 2018, J.H. Darbie initially refused to accept a deposit of Issuer B
securities by Client 1 because of promotional activity in the stock.
55. Nevertheless, in August 2018, Client 1 and Client 2, in numerous successive
deposits, deposited shares of Issuer B at J.H. Darbie. Client 1 and Client 2 obtained the shares of
Issuer B directly from the issuer in the form of convertible notes in July and November of 2017.
56. Between August 2018 and November 2018, Client 1 had seven 10% hits and
Client 2 had four 10% hits and nine additional 25% hits that required J.H. Darbie, according to
its AML P&P, to investigate and approve the deposits.
57. Over the same period, Client 1 and Client 2 sold their shares to the public in
heavy trading. Client 1 and Client 2 traded Issuer B securities on 42 and 40 trading days,

13

respectively. Client 1 sales constituted more than 25% of the daily trading volume of Issuer B on
ten days. Client 2 sales accounted for more than 40% of the daily trading volume of Issuer B on
eight days.
58. On at least three occasions during the period, J.H. Darbie compliance
acknowledged in internal documents the price and/or volume increases in Issuer B securities.
59. J.H. Darbie refused to accept a deposit of Issuer B securities by Client 2 because
of promotional activity by the issuer in the stock in October 2018. Although J.H. Darbie
temporarily paused deposits of Issuer B securities following this promotion, and a resulting price
increase, it did not conduct an investigation or file a SAR.
60. Despite the red flags and suspicious activity described above, J.H. Darbie never
conducted an investigation of the transactions in Issuer B, nor did it document its reasons for not
conducting such investigation.
61. As a result, J.H. Darbie failed to file SARs when it, at a minimum, had reason to
suspect that the transactions in Issuer B involved funds derived from illegal activity or involved
the use of the broker-dealer to facilitate criminal activity.
(iii)      Transactions in the Securities of “Issuer C”
62. Between January 2018 and December 2019, J.H. Darbie facilitated the deposit
and sale of over 13 million low-priced shares of “Issuer C” by ten J.H. Darbie clients.
63. Since 2008, Issuer C has had three different names and business lines.
64. From July 2018 through September 2018, Issuer C was highlighted in at least
thirteen promotional articles by a stock promoter.
65. In July 2018 alone, J.H. Darbie clients accounted for over 30% of the daily
trading volume in Issuer C on 14 separate days.

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66. In August 2018, one of J.H. Darbie’s clearing brokers (“Broker B”) rejected a
deposit of Issuer C shares by a J.H. Darbie customer (“Client 3”) that coincided with price spikes
and stock promotions of Issuer C’s shares. Broker B informed J.H. Darbie of the reason for the
denial, but J.H. Darbie’s clients continued to liquidate shares of Issuer C throughout August
2018, and J.H. Darbie never conducted any investigation of transactions in Issuer C, nor did it
file a SAR.
67. In September 2019, Issuer C was again the subject of stock promotional activity.
68. Client 4—which had common beneficial owners as Client 3—deposited over
200,000 shares of Issuer C on September 9, 2019, and sold over 180,000 of those shares over the
next four trading days—accounting for more than 10% of the daily trading volume on each of the
days it traded. After selling its shares, Client 4 withdrew approximately $960,000—which
included its entire net proceeds from the sales—on September 26, 2019.
69. Despite the suspicious DSW activity by Client 4, J.H. Darbie did not conduct an
investigation or file a SAR.
70. In addition, J.H. Darbie clients accounted for high percentages of the daily trading
volume for Issuer C on numerous occasions—Client 4 constituted over 46% of the daily trading
volume on 30 days and sales by three other clients constituted over 40% of the daily trading
volume on 9 other days.
71. Despite the red flags and suspicious activity described above, J.H. Darbie did not
conduct an investigation of the transactions in Issuer C, nor did it document its reasons for not
conducting such investigation.

15

72. As a result, J.H. Darbie failed to file SARs when it, at a minimum, had reason to
suspect that the transactions in Issuer C involved funds derived from illegal activity or involved
the use of the broker-dealer to facilitate criminal activity.
(iv)  Transactions in the Securities of “Issuer D”
73. In a three-month period between May 2018 and July 2018, J.H. Darbie facilitated
the deposit and sale of over 3.8 million low-priced securities of “Issuer D” by Client 4.
74. Issuer D was purportedly a health-care company, but prior to a name change in
2016, Issuer D purportedly was a manufacturer of commercial boats.
75. J.H. Darbie knew from due diligence it conducted in accepting a deposit of shares
of Issuer D that the company was mentioned in reporting concerning the “Panama Papers” and
that a former Issuer D director was the subject of a Commission enforcement action and subject
to an order barring him from engaging in the offer of penny stocks.
76. J.H. Darbie was also aware that one of its clearing brokers, Broker B, rejected a
deposit by Client 4 of Issuer D securities from J.H. Darbie in February 2018 due to, as it
informed J.H. Darbie, the inability to substantiate promotional press releases by Issuer D.
77. Despite Broker B’s rejection of the deposit and the promotional activity it
flagged, J.H. Darbie performed no further investigation and did not file a SAR. In fact, J.H.
Darbie permitted Client 4 to deposit the shares again beginning only three months later, this time
through Broker A.
78. Between May and July 2018, Client 4’s sales of Issuer D securities constituted
more than 50% of the daily trading volume on more than 30 trading days.
79. In addition, Client 4 engaged in suspicious DSW activity. Between May 4, 2018
and July 30, 2018, Client 4 deposited over 4.4 million shares of Issuer D, sold approximately 3.8

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million shares, and wired out the entire net proceeds of those sales—over $116,000—in a series
of wires throughout that three-month period.
80. On July 10, 2018, J.H. Darbie conducted a suspicious activity investigation in
accordance with its AML P&P and restricted trading in Issuer D. But J.H. Darbie did not include
any documentation of its investigation in its internal investigation report and failed to note the
other suspicious activity related to the trading in Issuer D securities.
81. Nor did J.H. Darbie file a SAR in connection with this instance of suspicious
activity.
82. On the very next day, July 11, 2018, J.H. Darbie allowed Client 4 to deposit more
than 10% of the outstanding shares in Issuer D.
83. Despite the red flags and suspicious activity described above, J.H. Darbie failed to
file SARs when it, at a minimum, had reason to suspect that the transactions in Issuer D involved
funds derived from illegal activity or involved the use of the broker-dealer to facilitate criminal
activity.
C. J.H. Darbie’s Failure to Make or Maintain Internal Reports
84. As described above, despite having an AML P&P requiring the firm to surveil for,
investigate, and report suspicious conduct, J.H. Darbie failed to implement those written policies
and procedures in practice, including failing to make or maintain internal reports concerning
suspicious activity by its clients.
85. Although the AML P&P required J.H. Darbie employees to utilize the
“Suspicious Activity Referral Form” to report suspicious transactions for investigation by the
AML compliance officer, the firm was unable to produce to the Commission any such forms as
required by Section 17(a) of the Exchange Act for the Relevant Period. Either no such forms

17

were actually utilized during the Relevant Period or J.H. Darbie did not retain such forms as
required by Section 17(a) and Rule 17a-4.
86. In addition, with respect to the review of the 10% and 25% hits described above
in paragraph 27, J.H. Darbie either failed to investigate, failed to document its investigation of
those transactions in accordance with its AML P&P, or failed to maintain documents of its
investigation in accordance with Section 17(a) and Rule 17a-4 of the Exchange Act.
87. Moreover, J.H. Darbie’s AML P&P required that 25% hits be reviewed by a
senior management committee and that sales of such low-priced securities could not occur
without written documentation of the committee’s approval and the basis for such approval (or
disapproval if such sales were rejected).
88. But the senior management committee either failed to review the 25% hits, failed
to document its review and approval determination, or failed to maintain records of its review
and approval determination in at least 100 instances.
89. Although J.H. Darbie’s AML P&P required the firm to conduct investigations of
potentially reportable activity or document the reasons for not conducting such investigation, in
many instances, J.H. Darbie neither conducted an investigation nor documented the basis for
failing to do so. Where J.H. Darbie did complete its “Suspicious Activity Investigation” forms
during the Relevant Period, it failed to maintain the supporting documentation for such forms in
numerous instances in accordance with Section 17(a) and Rule 17a-4 of the Exchange Act.
CLAIM FOR RELIEF
Violations of Section 17(a) of the Exchange Act and Rule 17a-8 Thereunder

90. The Commission repeats, realleges, and incorporates by reference paragraphs 1
through 89, as though fully set forth herein.

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91. As detailed above, J.H. Darbie failed to file SARs as required by the BSA and its
implementing regulations.
92. As detailed above, J.H. Darbie failed to comply with the reporting, recordkeeping,
and record retention requirements of FinCEN’s regulations implementing the BSA, which among
other things, require broker-dealers to implement and maintain a written anti-money laundering
program that complies with the requirements set forth in the FinCEN regulations and the self-
regulatory organization governing the broker-dealer. See 31 C.F.R. § 1023.210.
93. By virtue of the foregoing, J.H. Darbie violated, and unless restrained and
enjoined, will again violate Section 17(a) of the Exchange Act [15 U.S.C. § 78q(a)] and Rule
17a-8 thereunder [17 C.F.R. §24.17a-8].
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court grant the following
relief:
I.
A Final Judgment permanently restraining and enjoining Defendant, its agents, servants,
employees and attorneys and other persons in active concert or participation with it who receive
actual notice of the injunction by personal service or otherwise from violating, or aiding and
abetting violations of, Section 17(a) of the Exchange Act [15 U.S.C. § 78q(a)] and Rule 17a-8
thereunder [17 C.F.R. § 240.17a-8];
II.
A Final Judgment directing the Defendant to pay civil money penalties pursuant to
Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]; and

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III.
Such other and further relief as this Court deems appropriate and necessary for the benefit
of investors.
JURY DEMAND

 Pursuant to Rule 38 of the Federal Rules of Civil Procedure, Plaintiff demands that this
case be tried to a jury.
Dated: New York, New York
 December 12, 2022

SECURITIES AND EXCHANGE COMMISSION

By: _/s/ Thomas P. Smith, Jr. ___________
Thomas P. Smith, Jr.
Alison Conn
Victor Suthammanont
Christine D. Ely
     100 Pearl Street, Suite 20-100
New York, NY 10004-2616
(212) 336-5674 (Suthammanont)
Email: [email protected]

Attorneys for Plaintiff

Of Counsel:
Suzanne Bettis*
Securities and Exchange Commission
100 Pearl Street, Suite 20-100
New York, NY 10004-2616

* Not admitted in the U.S. District Court for the
Southern District of New York

Thomas P. Smith, Jr. 
Alison Conn 
Victor Suthammanont 
Christine D. Ely 
Suzanne Bettis* 
SECURITIES AND EXCHANGE COMMISSION 
New York Regional Office 
100 Pearl Street, Suite 20-100 
New York, New York 10004-2616 
(212) 336-5674 (Suthammanont)  
Email: [email protected] 
*Not Admitted in SDNY 

UNITED STATES DISTRICT COURT 
SOUTHERN DISTRICT OF NEW YORK 
 
SECURITIES AND EXCHANGE COMMISSION, 
 

Plaintiff, 
 

-- against -- 
 
J.H. DARBIE & CO., INC., 
 

Defendant. 
 

  
 
22 Civ. 10482 ( ) 
 
ECF Case 
 
COMPLAINT 
AND JURY DEMAND 
 
 

 
Plaintiff Securities and Exchange Commission (“Commission”), for its Complaint against 

Defendant J.H. Darbie & Co., Inc. (“J.H. Darbie”) alleges as follows:  

SUMMARY OF THE ALLEGATIONS 
 

1. This case concerns J.H. Darbie’s failures to comply with its legal obligation to file 

Suspicious Activity Reports (“SARs”) with the U.S. Treasury Department’s Financial Crimes 

Enforcement Network (“FinCEN”). Between January 2018 and January 2020 (the “Relevant 

Period”), J.H. Darbie, a broker-dealer registered with the Commission, generated millions of 

dollars in revenue in various transaction fees from brokering more than $105 million in 

transactions in low-priced securities1 that are traded on over-the-counter (“OTC”) markets. 

                                                 
1  For purposes of this Complaint, “low-priced securities” are those priced at less than $5 per share. 

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2. The Bank Secrecy Act [codified at 31 U.S.C. §§ 5311-5314, 5316-5336 and 12 

U.S.C. § 1829b, 1951-1959] (“BSA”) and its implementing regulations require broker-dealers 

like J.H. Darbie to file SARs with FinCEN to report suspicious transactions conducted or 

attempted by, at, or through their firms. See 31 C.F.R. § 1023.320(a)(2). FinCEN’s regulations 

impose deadlines for filing SARs and impose recordkeeping requirements related to such filings. 

Section 17(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 17a-8 

thereunder require broker-dealers to comply with the recordkeeping, retention, and reporting 

obligations of the BSA and its implementing regulations.  

3. During the Relevant Period, J.H. Darbie had written anti-money laundering 

policies and procedures (“AML P&P”). The AML P&P required that J.H. Darbie file a SAR 

consistent with the BSA and its implementing regulations. Despite the written AML P&P, J.H. 

Darbie failed to implement them in multiple ways that resulted in its failure to file SARs in 

accordance with the BSA and its implementing regulations, Exchange Act Rules, as well as the 

firm’s own written policies.  

4. Because J.H. Darbie failed to file SARs in compliance with its legal and 

regulatory obligations, J.H. Darbie deprived U.S. regulators and law enforcement of information 

concerning potential wrongdoing and undermined the purposes of the BSA by allowing potential 

illicit activity and actors to avoid scrutiny.  

VIOLATIONS 

5. By engaging in the conduct set forth in this Complaint, Defendant J.H. Darbie 

violated Section 17(a) of the Exchange Act and Rule 17a-8 thereunder.  

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6. Unless Defendant is permanently restrained and enjoined, it will again engage in 

the acts, practices, and courses of business set forth in this Complaint, and in acts, practices, and 

courses of business of similar type and object. 

NATURE OF THE PROCEEDING AND RELIEF SOUGHT 

7. The Commission brings this action pursuant to the authority conferred upon it by 

Sections 21(d)(1), (d)(3), and (d)(5) of the Exchange Act [15 U.S.C. §§ 78u(d)(1), (d)(3), and 

(d)(5)] seeking a final judgment: (a) permanently restraining and enjoining J.H. Darbie from 

engaging in the acts, practices, and courses of business alleged herein; and (b) imposing civil 

monetary penalties on J.H. Darbie pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 

78u(d)(3)]. 

JURISDICTION AND VENUE 

8. This Court has jurisdiction over this action pursuant to Sections 21(d) and (e) and 

27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78aa]. Certain of the acts, practices, 

transactions, and courses of business alleged in this Complaint were effected, directly or 

indirectly, by making use of means or instrumentalities of transportation or communications in 

interstate commerce, or the mails, or the facilities of a national securities exchange. 

9. Venue is proper in the Southern District of New York pursuant to Section 27 of 

the Exchange Act [15 U.S.C. § 78aa]. Among other things, J.H. Darbie is headquartered and has 

its principal place of business in New York, New York, transacts business within this district, 

and certain of the acts, practices, transactions, and courses of business alleged in this Complaint 

occurred within this district.  

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DEFENDANT 

10. J.H. Darbie is a private New York corporation with its principal place of 

business in New York, New York. It has been registered with the Commission as a broker-dealer 

since 1998. J.H. Darbie is subject to the requirements of the BSA. The firm has a history of 

disciplinary actions against it, including actions by FINRA in 2015 and the Commission in 2018, 

for failing to fulfill its regulatory obligations. 

BACKGROUND ON FINCEN RULES AND FORMS 

11. The BSA, as implemented in regulations promulgated by FinCEN, requires 

broker-dealers to file SARs to report, among other things, a transaction (or a pattern of 

transactions of which the transaction is a part) involving or aggregating to at least $5,000 that the 

broker-dealer knows, suspects, or has reason to suspect: (1) involves funds derived from illegal 

activity or that was conducted to disguise funds derived from illegal activity; (2) was designed to 

evade any requirements of the BSA; (3) had no business or apparent lawful purpose; or (4) 

involved the use of the broker-dealer to facilitate criminal activity. See 31 C.F.R. § 

1023.320(a)(2).  

12. FinCEN requires suspicious transactions be reported via a SAR no later than 30 

calendar days after the broker-dealer detects the facts that may constitute a basis for the filing of 

a SAR, subject to a 30-day extension to identify a suspect, but must report all cases within 60 

days. See 31 C.F.R. §1023.320(b)(3). Some cases, such as ongoing money laundering schemes, 

also require telephonic notification to law enforcement in addition to the timely filing of a SAR. 

Id. 

13. FinCEN also requires broker-dealers to implement and maintain a written anti-

money laundering program that complies with the requirements set forth in the FinCEN 

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regulations and the self-regulatory organization governing the broker-dealer. See 31 C.F.R. § 

1023.210.  

14. FINRA is the self-regulatory organization that governs J.H. Darbie. 

15. FINRA Rule 3310 requires that member broker-dealers “develop and implement a 

written anti-money laundering program reasonably designed to achieve and monitor the 

member’s compliance with the requirements of the [BSA], and the implementing regulations 

promulgated by the Department of the Treasury.”  

FACTS 

A. J.H. Darbie’s Written AML Policies and Procedures 

16. During the Relevant Period, J.H. Darbie’s AML P&P required the firm to file a 

SAR consistent with the BSA and FinCEN regulations as described above. 

17. In addition, the AML P&P identified certain suspicious activity or “red flags” that 

were to be reported to the AML Compliance Officer for his consideration as to whether further 

investigation and a SAR filing were necessary. As relevant here, the AML P&P enumerated red 

flags associated with illicit conduct in connection with the trading of low-priced securities. 

18. The red flags enumerated in the AML P&P are consistent with common patterns 

in illicit low-priced securities schemes such as illegal unregistered offerings and pump-and-dump 

schemes in which the perpetrators will engage in touts of the stock and/or manipulative trading 

to raise the price and/or trading volume of the security before selling their shares to the public. 

Once the perpetrators complete the liquidation of their shares, they typically cease the 

manipulative efforts and the price of the security collapses.  

19. For example, the AML P&P identified as a red flag transactions involving issuers 

with frequent name changes or rapidly changing business lines. One common pattern in illicit 

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low-priced-securities schemes is that perpetrators will take control of an existing publicly traded 

issuer of low-priced securities and change the name of the company and purported business prior 

to performing an illegal unregistered offering or pump-and-dump scheme. 

20. The AML P&P also identified the presence of stock promotional activities before 

or during the liquidation period (i.e., when the securities were being sold) as a red flag. As noted 

above, promotional campaigns designed to increase investors’ interest in a particular low-priced 

security are often used by fraudsters to create a market for shares and/or to drive up the price of a 

security they intend to dump into the public market for profit. 

21. Another red flag identified in the AML P&P is the presence of unusual price 

fluctuations (in particular price increases occurring at a time during which a J.H. Darbie client is 

liquidating the low-priced securities). Unusual price fluctuations may occur in illicit schemes as 

the result of promotional activities or manipulative trading. 

22. The AML P&P also flagged for attention instances where investors seek to effect 

multiple “rapid-fire” stock conversions aggregating to substantial amounts of the shares 

outstanding or public float. Perpetrators of low-priced securities schemes often obtain the shares 

they dump to the unsuspecting public through convertible debt transactions in which they acquire 

purported debt of an issuer that is convertible to shares of the company. The illicit actors then 

convert such debt to shares, sometimes through strawmen or co-conspirators, which they then 

use for manipulative trading and/or to sell to the public. 

23. J.H. Darbie’s AML P&P also identified as a suspicious practice the deposit of 

low-priced securities with a broker, liquidation or sale of such securities, followed by the 

withdrawal of the proceeds. This deposit, sale, and withdrawal (“DSW”) practice is common in 

low-priced securities schemes, including illegal offerings. 

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24. In addition to these red flags, J.H. Darbie’s AML P&P also incorporated red flags 

listed in FINRA Regulatory Notice 09-05 (Jan. 2009), which identified examples of red flags 

indicating the possibility of an illegal, unregistered distribution. But the FINRA notice cautioned 

that the red-flag examples were “merely illustrative” and that other situations may arise that may 

signal that the broker should investigate a proposed transaction. 

25. During the Relevant Period, FINRA updated its guidance to list numerous red 

flags associated with securities deposits, trading, and money movement activity. See FINRA 

Regulatory Notice 19-18 (May 2019). Despite a requirement in the AML P&P that they be 

reviewed for possible amendment not less than annually, J.H. Darbie did not review and amend 

them to include the additional suspicious activity specifically identified by FINRA in this Notice. 

26. In addition to the above red flags, the AML P&P documented certain systems and 

processes to monitor for and investigate potentially suspicious activity.  

27. For example, the AML P&P required J.H. Darbie employees to enter information 

into a “Deposit Tracking System” that would automatically flag deposits by clients that 

aggregated to over 10% (“10% hits”) or 25% (“25% hits”) of the outstanding shares of the issuer 

over the previous three or six months.2 J.H. Darbie’s AML compliance officer was responsible 

for reviewing the 10% or 25% hits to identify any other red flags related to those transactions. In 

addition, a senior management committee was required to review the 25% hits. 

28. J.H. Darbie also designated certain securities as “Heightened Risk Securities” 

(“HRS”). Compliance personnel were required by the AML P&P to investigate for stock-

promotional activity whenever these stocks were deposited or liquidated.  

                                                 
2  In September 2018, J.H. Darbie revised the threshold period from six to three months.   

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29. Whenever a J.H. Darbie employee identified a transaction that potentially 

required the filing of a SAR, pursuant to the AML P&P, the employee was required to 

immediately report the transaction to the AML compliance officer, who was responsible for 

determining whether further investigation was necessary. 

30. A J.H. Darbie employee identifying such a “reportable transaction” under the 

AML P&P was required to report the transaction to the AML compliance officer using a 

“Suspicious Activity Referral Form.” 

31. If the AML compliance officer determined to investigate suspicious activity, the 

AML P&P required that either he or a trade supervisor document the investigation on a 

Suspicious Activity Investigation form, including any supporting documentation.  

32. If the AML compliance officer determined that an investigation was unnecessary 

following a report of potentially suspicious activity, the AML P&P required that he document 

that determination in a memo to be retained in the client’s file. 

B. J.H. Darbie’s Failure to File Suspicious Activity Reports 

33. Despite having AML P&P requiring the firm to surveil for, investigate, and report 

suspicious conduct, J.H. Darbie failed to implement those written policies and procedures in 

practice. The firm’s shortcomings resulted in its failure to file numerous SARs where the firm 

had—at the minimum—a reason to suspect illegal activity and thus a SAR filing was required 

pursuant to the BSA and its implementing regulations, Exchange Act Rules, and J.H. Darbie’s 

own AML P&P. 

34. J.H. Darbie accepted for deposit the low-priced securities of approximately 160 

issuers reflected in approximately 1,800 deposits at one of its clearing brokers (“Broker A”), and 

the further processing of approximately $105 million in net transaction proceeds to customers 

through approximately 12,000 sale transactions involving 30 billion shares of such issuers 

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between January 2018 and January 2020. As outlined below, despite multiple indicia of 

suspicious activity in connection with many of those transactions, the J.H. Darbie employee 

primarily responsible for handing such deposits and liquidations never reported a single 

transaction as potentially suspicious to the AML compliance officer.  

35. Although J.H. Darbie understood, as reflected in the AML P&P, that multiple 

“rapid-fire” conversions of convertible debt to shares of low-priced securities deposited to J.H. 

Darbie was an indicia of suspicious activity warranting investigation, the firm did not review 

every conversion and deposit of low-priced securities arising from the same debt instrument for 

red flags or indicia of suspicious activity.  

36. J.H. Darbie also failed to monitor for new promotional activity occurring in 

connection with the conversion and deposits of low-priced securities. 

37. For example, although J.H. Darbie designated certain low-priced securities as 

HRS and generated reports noting the daily trade volume in such securities, it did not review 

those reports together with information concerning close-in-time deposits of such securities or 

withdrawals of proceeds of the trading in such securities from customer accounts. Because the 

firm did not monitor the trading activity in connection with the deposit and withdrawal activity, 

it failed to investigate suspicious DSW activity—an indicia of potential illegal conduct. 

38. As a result, J.H. Darbie ignored or failed to investigate numerous indicia of 

suspicious conduct identified in FINRA guidance and the AML P&P requiring investigation to 

determine whether a SAR needed to be filed.  

39. In at least 168 instances, J.H. Darbie failed to investigate or file SARs in 

connection with suspicious DSW activity, specifically where a customer deposited shares of a 

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low-priced security issuer into its account, sold the shares for proceeds totaling at least $50,000, 

and the same customer withdrew at least $50,000, all within 31 or fewer calendar days.  

a. Specifically, while any of the deposits, sales, or withdrawals themselves may 

have warranted the filing of a SAR depending on the circumstances, the 

withdrawal activity in particular was suspicious in light of the deposit, sale, 

and withdrawal pattern, which as described in paragraph 23 above, is common 

in low-priced securities schemes, including illegal offerings. 

b. In the absence of a reasonable investigation that determined the activity was 

not suspicious and thus a SAR filing was not required, the withdrawals in light 

of the DSW pattern in these instances should have triggered the filing of a 

SAR. 

40. On at least 74 occasions, one of the broker-dealer firms that cleared J.H. Darbie’s 

transactions rejected a deposit of low-priced securities by a J.H. Darbie customer, but J.H. 

Darbie did not conduct an investigation or file a SAR in connection with the deposits. 

41. In at least 32 instances, J.H. Darbie failed to file a SAR where transactions had 

two or more red flags identified in J.H. Darbie’s AML P&P. In many of these instances, J.H. 

Darbie also did not investigate the transactions.   

42. The following paragraphs set forth four illustrative examples of J.H. Darbie’s 

failure to file SARs as required.  

(i)  Transactions in the Securities of “Issuer A”  

43. For example, between August 2018 and December 2019, J.H. Darbie facilitated 

the deposit of more than 1.35 billion low-priced securities of “Issuer A” and the sale of more 

than 1.1 billion of those securities, by two of its customers, Client 1 and Client 2.  

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44. Between October 2018 and December 2019, Client 1’s and Client 2’s deposits of 

Issuer A securities generated nine 10% hits and nine additional 25% hits, requiring, according to 

the AML P&P, review and approval of the deposits by the AML compliance officer or, in the 

case of the 25% hits, senior management committee review. 

45. In reviewing these deposits, J.H. Darbie personnel did not review the deposit in 

light of liquidation or sales activity or for other indicia of suspicious activity and often copied the 

approval explanation from a prior deposit. 

46. But several red flags were present during the period, including (i) stock promotion 

campaigns in December 2018, (ii) a 200% price increase in the value of the shares, (iii) that 

Issuer A’s former CEO had been charged previously with conspiracy to commit mail, wire, and 

securities fraud, (iv) that Issuer A was previously a shell company with less than $15,000 in 

revenue as of its most recent Form 10-K, and (v) that Issuer A had several prior business lines 

and names. 

47. In addition, Client 1’s sales of Issuer A securities constituted more than 70% of 

the daily trade volume on 14 days during the period, and Client 2’s sales of Issuer A securities 

constituted more than 70% of the daily trade volume on 19 days during the period. 

48. Despite the red flags and suspicious activity described above, J.H. Darbie did not 

conduct investigations of the transactions in Issuer A, nor did it document its reasons for not 

conducting such investigations.  

49. As a result, J.H. Darbie failed to file SARs when it, at a minimum, had reason to 

suspect that the transactions in Issuer A involved funds derived from illegal activity or involved 

the use of the broker-dealer to facilitate criminal activity. 

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(ii)  Transactions in the Securities of “Issuer B”  

50. Between August and November 2018, J.H. Darbie accepted the deposit and 

facilitated the sale transactions of over 1.5 billion low-priced securities of “Issuer B” by Client 1 

and Client 2. The 1.5 billion shares constituted nearly 70% of Issuer B’s issued and outstanding 

shares as of November 30, 2018. 

51. As early as July 2018, J.H. Darbie was aware or should have been aware of 

multiple suspicious circumstances and red flags related to Issuer B and its securities. 

52. First, Issuer B, as recently as 2016, had changed its purported business line from 

an e-cigarette business to a security technology business. 

53. Second, Issuer B’s most recent Form 10-K reported that the company had no 

employees, no intellectual property, no revenue, total assets of $1,684, and had no expenditures 

relating to research or development over the prior two fiscal years—all of which indicated that 

the company was or may have been a shell issuer. 

54. Third, in July 2018, J.H. Darbie initially refused to accept a deposit of Issuer B 

securities by Client 1 because of promotional activity in the stock.   

55. Nevertheless, in August 2018, Client 1 and Client 2, in numerous successive 

deposits, deposited shares of Issuer B at J.H. Darbie. Client 1 and Client 2 obtained the shares of 

Issuer B directly from the issuer in the form of convertible notes in July and November of 2017. 

56. Between August 2018 and November 2018, Client 1 had seven 10% hits and 

Client 2 had four 10% hits and nine additional 25% hits that required J.H. Darbie, according to 

its AML P&P, to investigate and approve the deposits. 

57. Over the same period, Client 1 and Client 2 sold their shares to the public in 

heavy trading. Client 1 and Client 2 traded Issuer B securities on 42 and 40 trading days, 

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respectively. Client 1 sales constituted more than 25% of the daily trading volume of Issuer B on 

ten days. Client 2 sales accounted for more than 40% of the daily trading volume of Issuer B on 

eight days. 

58. On at least three occasions during the period, J.H. Darbie compliance 

acknowledged in internal documents the price and/or volume increases in Issuer B securities.  

59. J.H. Darbie refused to accept a deposit of Issuer B securities by Client 2 because 

of promotional activity by the issuer in the stock in October 2018. Although J.H. Darbie 

temporarily paused deposits of Issuer B securities following this promotion, and a resulting price 

increase, it did not conduct an investigation or file a SAR. 

60. Despite the red flags and suspicious activity described above, J.H. Darbie never 

conducted an investigation of the transactions in Issuer B, nor did it document its reasons for not 

conducting such investigation.  

61. As a result, J.H. Darbie failed to file SARs when it, at a minimum, had reason to 

suspect that the transactions in Issuer B involved funds derived from illegal activity or involved 

the use of the broker-dealer to facilitate criminal activity. 

(iii)  Transactions in the Securities of “Issuer C”  

62. Between January 2018 and December 2019, J.H. Darbie facilitated the deposit 

and sale of over 13 million low-priced shares of “Issuer C” by ten J.H. Darbie clients. 

63. Since 2008, Issuer C has had three different names and business lines. 

64. From July 2018 through September 2018, Issuer C was highlighted in at least 

thirteen promotional articles by a stock promoter.  

65. In July 2018 alone, J.H. Darbie clients accounted for over 30% of the daily 

trading volume in Issuer C on 14 separate days. 

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66. In August 2018, one of J.H. Darbie’s clearing brokers (“Broker B”) rejected a 

deposit of Issuer C shares by a J.H. Darbie customer (“Client 3”) that coincided with price spikes 

and stock promotions of Issuer C’s shares. Broker B informed J.H. Darbie of the reason for the 

denial, but J.H. Darbie’s clients continued to liquidate shares of Issuer C throughout August 

2018, and J.H. Darbie never conducted any investigation of transactions in Issuer C, nor did it 

file a SAR. 

67. In September 2019, Issuer C was again the subject of stock promotional activity.  

68. Client 4—which had common beneficial owners as Client 3—deposited over 

200,000 shares of Issuer C on September 9, 2019, and sold over 180,000 of those shares over the 

next four trading days—accounting for more than 10% of the daily trading volume on each of the 

days it traded. After selling its shares, Client 4 withdrew approximately $960,000—which 

included its entire net proceeds from the sales—on September 26, 2019.  

69. Despite the suspicious DSW activity by Client 4, J.H. Darbie did not conduct an 

investigation or file a SAR.  

70. In addition, J.H. Darbie clients accounted for high percentages of the daily trading 

volume for Issuer C on numerous occasions—Client 4 constituted over 46% of the daily trading 

volume on 30 days and sales by three other clients constituted over 40% of the daily trading 

volume on 9 other days. 

71. Despite the red flags and suspicious activity described above, J.H. Darbie did not 

conduct an investigation of the transactions in Issuer C, nor did it document its reasons for not 

conducting such investigation.  

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72. As a result, J.H. Darbie failed to file SARs when it, at a minimum, had reason to 

suspect that the transactions in Issuer C involved funds derived from illegal activity or involved 

the use of the broker-dealer to facilitate criminal activity. 

(iv)  Transactions in the Securities of “Issuer D”  

73. In a three-month period between May 2018 and July 2018, J.H. Darbie facilitated 

the deposit and sale of over 3.8 million low-priced securities of “Issuer D” by Client 4. 

74. Issuer D was purportedly a health-care company, but prior to a name change in 

2016, Issuer D purportedly was a manufacturer of commercial boats. 

75. J.H. Darbie knew from due diligence it conducted in accepting a deposit of shares 

of Issuer D that the company was mentioned in reporting concerning the “Panama Papers” and 

that a former Issuer D director was the subject of a Commission enforcement action and subject 

to an order barring him from engaging in the offer of penny stocks.  

76. J.H. Darbie was also aware that one of its clearing brokers, Broker B, rejected a 

deposit by Client 4 of Issuer D securities from J.H. Darbie in February 2018 due to, as it 

informed J.H. Darbie, the inability to substantiate promotional press releases by Issuer D. 

77. Despite Broker B’s rejection of the deposit and the promotional activity it 

flagged, J.H. Darbie performed no further investigation and did not file a SAR. In fact, J.H. 

Darbie permitted Client 4 to deposit the shares again beginning only three months later, this time 

through Broker A. 

78. Between May and July 2018, Client 4’s sales of Issuer D securities constituted 

more than 50% of the daily trading volume on more than 30 trading days.  

79. In addition, Client 4 engaged in suspicious DSW activity. Between May 4, 2018 

and July 30, 2018, Client 4 deposited over 4.4 million shares of Issuer D, sold approximately 3.8 

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million shares, and wired out the entire net proceeds of those sales—over $116,000—in a series 

of wires throughout that three-month period.  

80. On July 10, 2018, J.H. Darbie conducted a suspicious activity investigation in 

accordance with its AML P&P and restricted trading in Issuer D. But J.H. Darbie did not include 

any documentation of its investigation in its internal investigation report and failed to note the 

other suspicious activity related to the trading in Issuer D securities.  

81. Nor did J.H. Darbie file a SAR in connection with this instance of suspicious 

activity. 

82. On the very next day, July 11, 2018, J.H. Darbie allowed Client 4 to deposit more 

than 10% of the outstanding shares in Issuer D. 

83. Despite the red flags and suspicious activity described above, J.H. Darbie failed to 

file SARs when it, at a minimum, had reason to suspect that the transactions in Issuer D involved 

funds derived from illegal activity or involved the use of the broker-dealer to facilitate criminal 

activity. 

C. J.H. Darbie’s Failure to Make or Maintain Internal Reports  

84. As described above, despite having an AML P&P requiring the firm to surveil for, 

investigate, and report suspicious conduct, J.H. Darbie failed to implement those written policies 

and procedures in practice, including failing to make or maintain internal reports concerning 

suspicious activity by its clients.  

85. Although the AML P&P required J.H. Darbie employees to utilize the 

“Suspicious Activity Referral Form” to report suspicious transactions for investigation by the 

AML compliance officer, the firm was unable to produce to the Commission any such forms as 

required by Section 17(a) of the Exchange Act for the Relevant Period. Either no such forms 

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were actually utilized during the Relevant Period or J.H. Darbie did not retain such forms as 

required by Section 17(a) and Rule 17a-4.  

86. In addition, with respect to the review of the 10% and 25% hits described above 

in paragraph 27, J.H. Darbie either failed to investigate, failed to document its investigation of 

those transactions in accordance with its AML P&P, or failed to maintain documents of its 

investigation in accordance with Section 17(a) and Rule 17a-4 of the Exchange Act. 

87. Moreover, J.H. Darbie’s AML P&P required that 25% hits be reviewed by a 

senior management committee and that sales of such low-priced securities could not occur 

without written documentation of the committee’s approval and the basis for such approval (or 

disapproval if such sales were rejected).  

88. But the senior management committee either failed to review the 25% hits, failed 

to document its review and approval determination, or failed to maintain records of its review 

and approval determination in at least 100 instances. 

89. Although J.H. Darbie’s AML P&P required the firm to conduct investigations of 

potentially reportable activity or document the reasons for not conducting such investigation, in 

many instances, J.H. Darbie neither conducted an investigation nor documented the basis for 

failing to do so. Where J.H. Darbie did complete its “Suspicious Activity Investigation” forms 

during the Relevant Period, it failed to maintain the supporting documentation for such forms in 

numerous instances in accordance with Section 17(a) and Rule 17a-4 of the Exchange Act.  

CLAIM FOR RELIEF 
Violations of Section 17(a) of the Exchange Act and Rule 17a-8 Thereunder 

 
90. The Commission repeats, realleges, and incorporates by reference paragraphs 1 

through 89, as though fully set forth herein. 

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91. As detailed above, J.H. Darbie failed to file SARs as required by the BSA and its 

implementing regulations.  

92. As detailed above, J.H. Darbie failed to comply with the reporting, recordkeeping, 

and record retention requirements of FinCEN’s regulations implementing the BSA, which among 

other things, require broker-dealers to implement and maintain a written anti-money laundering 

program that complies with the requirements set forth in the FinCEN regulations and the self-

regulatory organization governing the broker-dealer. See 31 C.F.R. § 1023.210. 

93. By virtue of the foregoing, J.H. Darbie violated, and unless restrained and 

enjoined, will again violate Section 17(a) of the Exchange Act [15 U.S.C. § 78q(a)] and Rule 

17a-8 thereunder [17 C.F.R. §24.17a-8].  

PRAYER FOR RELIEF 

WHEREFORE, the Commission respectfully requests that the Court grant the following 

relief:  

I. 

A Final Judgment permanently restraining and enjoining Defendant, its agents, servants, 

employees and attorneys and other persons in active concert or participation with it who receive 

actual notice of the injunction by personal service or otherwise from violating, or aiding and 

abetting violations of, Section 17(a) of the Exchange Act [15 U.S.C. § 78q(a)] and Rule 17a-8 

thereunder [17 C.F.R. § 240.17a-8]; 

II. 

A Final Judgment directing the Defendant to pay civil money penalties pursuant to 

Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]; and 

 

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III. 

Such other and further relief as this Court deems appropriate and necessary for the benefit 

of investors. 

JURY DEMAND 
 

 Pursuant to Rule 38 of the Federal Rules of Civil Procedure, Plaintiff demands that this 

case be tried to a jury. 

Dated: New York, New York  
 December 12, 2022 
    
 

SECURITIES AND EXCHANGE COMMISSION 

 
By: _/s/ Thomas P. Smith, Jr. ___________ 

Thomas P. Smith, Jr. 
Alison Conn 
Victor Suthammanont 
Christine D. Ely  

     100 Pearl Street, Suite 20-100 
New York, NY 10004-2616 
(212) 336-5674 (Suthammanont) 
Email: [email protected] 
 
Attorneys for Plaintiff 
 

Of Counsel: 
Suzanne Bettis* 
Securities and Exchange Commission 
100 Pearl Street, Suite 20-100 
New York, NY 10004-2616 
 

* Not admitted in the U.S. District Court for the 
Southern District of New York 

 

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