LPL failed to follow its own anti-money-laundering procedures when it opened a customer account and processed wire transfers for Eugenio Garcia Jimenez, Jr., an unregistered investment advisor who allegedly misappropriated $7.1 million of taxpayer funds from the city of Mayagüez, Puerto Rico, according to documents from the SEC.
Garcia presented a plan to invest approximately $9 million in unused Mayagüez funds for two years and promised a return of 8% to 10% every year with no risk to principal. Garcia fully leveraged the $9 million at two broker-dealers, “resulting in a margin call and closure of the brokerage accounts,” the SEC said.
“Despite various individuals in different departments questioning the account’s beneficial ownership, source of funds,” and the reason behind the transfer from a previous brokerage, LPL allowed Garcia to open an account he controlled in June 2016 and processed wire transfers he requested.
Neither Garcia nor his firm were registered with the SEC. On December 1, 2020, the SEC filed a complaint in federal court against Garcia alleging violations for defrauding Mayagüez, which has a population of 71,000 with a median household income of $14,236.
“We take our compliance and fraud governance obligations seriously and have made significant investments in the last few years to address the underlying issues related to this matter. We fully cooperated with our regulators and law enforcement to resolve and fully remediate this matter,” a spokesperson for LPL said in an email.
Teresa Verges, director of the Investor Rights Clinic at the University of Miami School of Law, said LPL’s violations are unfortunately not unusual.
“LPL’s problem was that the firm lacked a centralized reporting unit that could assess the conflicting information, conduct the necessary investigation and, ultimately, reject Garcia’s application to do business at the firm,” Verges said. “Financial firms should continually reassess its CIP (customer identification program) and anti-money-laundering practices to ensure that their process is reasonably designed to identify fraudulent conduct, particularly when the firm is providing a trading platform for a financial advisor handling investor funds.”
Allegations
Garcia, 48, of Orlando, Florida, is the CEO of Eugenio Garcia Jr. & Associates, a firm that assists municipal governments in investing in public development, establishing business relationships with potential investors, and “pursu[ing] capital endeavors and carry[ing] out business endeavors,” the SEC said in the document.
The SEC alleges Garcia opened an investment account for the Mayagüez Economic Development Inc. (MEDI) at a previous, unnamed brokerage firm called Brokerage Firm 1 in SEC documents and purchased $9 million in U.S. Treasury notes. Garcia also entered into a margin agreement and used as collateral the Treasurys in the MEDI account. From March 31, 2016 through April 20, 2016 Garcia requested a series of wire transfers through which he misappropriated $4.1 million using margin loans while at the first brokerage firm.
In late April 2016, staff at the first firm questioned the account’s wire activity and investment strategy because the MEDI account was losing money as “the funds borrowed on margin and transferred out were subject to a higher interest rate than the rate of return earned on the Treasurys,” according to SEC documents.
The first broker-dealer closed the account and gave Garcia until June 2016 to liquidate or transfer the account assets, the SEC said in documents.
Garcia reached out to an LPL advisor to begin the process of transferring the MEDI account assets to LPL and sent them an account statement from the first firm for MEDI, MEDI corporate documents, documents showing MEDI’s relationship to Mayagüez, an LPL account application and a copy of his passport.
The SEC alleges LPL failed to document its customer-verification procedures during the account-opening review process. LPL’s regulatorily-mandated Customer Identification Program procedures require a representative to tell LPL whether they have personally reviewed the original customer identification document, verify that the information conforms with other documents and verify that the identification document photograph matches the client’s physical appearance.
The LPL representative did not verify that the passport matched Garcia’s physical appearance before processing the account-opening paperwork. Garcia’s MEDI account application listed California addresses, though MEDI has never conducted nor maintained business outside of Puerto Rico. “LPL never verified the California addresses and the CIP (customer identification program) alert was instead resolved after the account was approved when Garcia updated the address to a Puerto Rico address — again different from the address listed in MEDI’s corporate documents,” the SEC alleges.
LPL allegedly violated the CIP rule, issued by the SEC and Treasury Department in 2003. It was designed to prevent use of securities for money laundering or terrorist financing. It requires broker-dealers to make, verify and keep records related to the identification of its customers, including each customer’s name, date of birth, address and identification number.
LPL also allegedly failed to reconcile conflicting information concerning MEDI. After a review, LPL’s financial intelligence unit (FIU) asked the representative to obtain more information from Garcia about MEDI’s purpose, beneficial ownership and source of funds
“Garcia told the representative, who provided the information to the FIU, that he was the beneficial owner of MEDI, and the source of funds was real estate holdings owned by MEDI. Garcia also provided LPL with a purported shareholder ledger showing his 100 percent ownership of MEDI,” the SEC document alleges.
The financial intelligence unit also found contradictions between Garcia’s responses, MEDI’s articles of incorporation and other publicly available information and recommended that LPL reject the account and exit the relationship, the SEC alleges. In response, Garcia began providing information about MEDI FS, a separate entity controlled by him. He amended the account-opening documents to reflect MEDI FS as the account holder instead of MEDI. Garcia also shared a MEDI FS shareholder ledger.
“At this point, various different LPL departments and personnel were in possession of the contradictory information Garcia had provided,” the SEC said in the document. “However, this collection of information was not reasonably channeled through any central reporting function.”
LPL opened an investment account with margin in the name of MEDI FS, listing a California address instead of a Puerto Rico one.
Garcia also asked the LPL representative to facilitate a line of credit with a bank. The bank had concerns about the MEDI line of credit application and other concerns expressed by LPL’s financial intelligence unit. The bank denied the line of credit for MEDI FS, and the LPL representative did not share the denial to the financial intelligence unit or other LPL staff, the SEC alleges.
The SEC also alleges that LPL approved wire transfers that resulted in misappropriation of funds. In June 2016, Treasurys from the MEDI account at Brokerage Firm 1 were transferred to the MEDI FS account at LPL, and the $4.1 million margin liability at the first brokerage was satisfied by releveraging the assets transferred into the new MEDI FS account via a margin account at LPL.
Garcia began requesting wire transfers using the MEDI FS margin account less than a week after the assets were transferred to LPL, the SEC alleges, including two requests that totaled $2 million. Garcia insisted that MEDI FS had no economic relationship with Mayagüez, yet a $1.8 million wire transfer was payable to the city. Garcia asked LPL to disregard the two requests after LPL’s Margin Department informed Garcia they would need to confirm the third-party wires.
“Garcia then submitted a new wire request for $2 million payable to MEDI FS’s outside bank account, thus avoiding the need for additional confirmation,” the SEC alleges.
LPL did ask about the purpose of the wire transfer, which Garcia said was to fund the construction of a bank in Puerto Rico. LPL approved the wire and a separate $650,000 request submitted in late June 2016.
In early July 2016, Garcia submitted a $1.7 million wire request to the LPL representative. Due to the loan-to-value requirements on the account, the representative informed Garcia that requests exceeding $500,000 would require a review. Garcia then submitted wire requests of $900,000 and $500,000. LPL approved the latter, which was allegedly for investment in a film.
LPL’s margin department service, trading and operations group (STO) requested the financial intelligence unit review the requests, citing concerns about the wire activity in the account.
Their investigation could not verify any connection between the California addresses and MEDI, MEDI FS or Garcia.
“The [financial intelligence unit] was also concerned that the account’s outgoing wire transfers and investment strategy appeared inconsistent with the purpose of a municipal economic development company. Based on this second investigation of the account, on July 12, 2016, LPL decided to exit the relationship with MEDI FS and froze any further wire activity,” according to the order.
LPL then liquidated the Treasurys to satisfy a margin call, retained $114,318 in fees and margin loan interest, and sent MEDI FS $1.7 million — the remaining account funds.
Remedial efforts
The SEC said in documents that LPL has undertaken “significant” remedial efforts by changing its policies to prevent Garcia’s actions from happening again. LPL has increased staffing of its fraud surveillance program, enhanced anti-money laundering escalations and reporting, and enhanced quality control testing for transaction monitoring and customer due diligence, among other measures.
LPL paid $3.3 million plus interest of nearly $850,000 to MEDI, representing the loss suffered by MEDI and Mayagüez.
Sanctions
LPL was ordered to pay a civil money penalty in the amount of $750,000 to the SEC.
The brokerage firm was also censured and ordered to cease and desist from committing similar violations in the future. LPL was ordered to pay a disgorgement fee of $114,318 and a prejudgment interest of $26,884, both of which were satisfied by LPL’s remedial actions, the SEC said.
