Archive

January 9, 2017

The SEC brought fraud charges against Gregory T. Dean and Donald J. Fowler, two New York-based brokers, for using an “in-and-out” trading strategy to generate hefty commissions for themselves despite the fact that the strategy was unsuitable for their customers. The SEC’s complaint alleges that Dean and Fowler did not conduct reasonable diligence to determine whether their investment strategy, which involved frequent buying and selling of securities, could deliver even a minimal profit to their customers. Their strategy, which generally involved selling securities within a week or two of purchase, and charging customers a fee for each transaction, allegedly resulted in substantial losses for at least 27 customers. The SEC also issued an Investor Alert warning about excessive trading and “churning” that can occur in brokerage accounts. SEC

December 27, 2016

The SEC charged three Chinese traders, Iat Hong, Bo Zheng, and Hung Chin, with hacking into the networks of two law firms, stealing confidential information pertaining to firm clients considering mergers or acquisitions, and trading on the nonpublic market-moving information to their benefit.  The SEC alleges that the defendants obtained almost $3 million in illegal profits from their scheme.  According to the SEC’s complaint, the alleged hacking incidents involved installing malware on the law firms’ networks, compromising accounts that enabled access to all email accounts at the firms, and copying and transmitting dozens of gigabytes of emails to remote internet locations.  SEC

December 20, 2016

Morgan Stanley & Co. LLC will pay $7.5 million to settle charges it used trades involving customer cash to lower the firm’s borrowing costs in violation of the SEC’s Customer Protection Rule.  The Customer Protection Rule is intended to safeguard customers’ assets so that they can be promptly returned should the broker-dealer fail.  The SEC’s order found that from March 2013 to May 2015, Morgan Stanley had its affiliate Morgan Stanley Equity Financing Ltd. serve as a customer of its U.S. broker-dealer.  This allowed the affiliate to use margin loans from the broker-dealer to finance the costs of hedging swap trades with customers.  The margin loans lowered the borrowing costs incurred to hedge these swap trades and reduced the U.S. broker-dealer’s customer reserve account deposit requirements by tens to hundreds of millions of dollars per day.  According to the SEC’s order, the transactions violated the Customer Protection rule, which prohibits broker-dealers from using affiliates to reduce their customer reserve account deposit requirements.  SEC

December 16, 2016

The SEC announced on-going cease and desist proceedings against Utah-based broker dealer Wilson-Davis & Co, and settled proceedings against a former Wilson-Davis proprietary trader, Anthony Kerrigon, Wilson-Davis’ vice president/head trader Byron Barkley, and Wilson-Davis’ Chairman/CEO Paul Davis for violations of Regulation SHO.  Regulation SHO requires that before a broker-dealer effects a short sale, the broker-dealer must “locate” a source of borrowable securities that can be delivered on the date that delivery is due.  The rule includes a limited exception for short sales executed in connection with bona fide market making.  The SEC alleges that from at least November 2011 to May 2013, Wilson-Davis relied on the bona-fide market making exception for all short sales by its proprietary trading group and that this reliance was improper for certain trades.  While improperly availing itself of the exception, Wilson-Davis engaged in numerous short sales in over-the-counter equity securities which violated Rule 203(b)(1) of Regulation SHO and resulted in improper trading profits.  In addition, Wilson-Davis violated various provisions of the Market Access Rule.  Kerrigone, Barkley, and Davis will pay, collectively, over $700,0000 to settle the charges against them.  SEC

December 16, 2016

Deutsche Bank will pay $18.5 million in penalties to the SEC and $18.5 million to the New York Attorney General’s Office to settle charges that it misled clients about the performance of a core feature of its automated order router that primarily sent client orders to dark pools.  According to the SEC’s order, Deutsche made materially misleading statements and omissions concerning the Dark Pool Ranking Model feature of one of its order routers, known as SuperX+.  The Model was intended to measure execution quality and liquidity of venues to which it sent orders.  Deutsche used the Model to determine which venues would receive orders and the sequence in which Deutsche would send them.  Deutsche stated that he Model “smartly routes and selects optimal pools of liquidity on an order by order basis.”  But according to the SEC’s order, due to a coding error, Deutsche updated the ranking model just once during a two-year period, causing at least two dark pools to receive inflated rankings and consequently millions of orders that SuperX+ would have sent elsewhere if the system was operating as described.  SEC

December 12, 2016

The SEC charged New Jersey-based traders Joseph Taub and Elazar Shmalo with manipulating more than 2,000 NYSE- and NASDAQ-traded stocks and reaping more than $26 million in profits from their successful trades.  The SEC alleges that Taub and Shmalo utilized dozens of accounts at various brokerage firms to carry out their scheme undetected, typically using two at a time to engage in a flurry of manipulative trading activity that usually lasted less than five minutes.  According to the SEC’s complaint, they would use one account to buy a position in a stock, and then use a second account to place a series of small buy orders to walk up the price for the first account to sell its larger position into the market at an artificially high price for significant profits.  In some instances, before the first account purchased its position in a stock, Taub and Shmalo would have the second account place a series of smaller sell orders to drive down the price of the stock, allowing the first account to buy its larger position in that stock at an artificially lowered price.  SEC

December 20, 2016

Igor B. Oystacher and 3Red Trading LLC were ordered to pay $2.5 million in a Consent Order ordered by Judge Amy J. St. Eve of the U.S. District Court for the Northern District of Illinois. for spoofing and employment of a manipulative and deceptive device while trading futures contracts on multiple futures exchanges. The two parties must jointly and severally pay a $2.5 million civil monetary penalty and are required to have an independent monitor assess and monitor all futures trading for three years. CFTC.

September 28, 2016

SG Americas Securities, LLC, successor to Newedge USA, LLC, a financial services firm registered with the CFTC as a Futures Commission Merchant, was ordered to pay a $750,000 penalty and undertake internal control procedures for participating in unlawful wash trades and for failing to diligently supervise employees over a three and a half year period.  CFTC

September 19, 2016

The CFTC ordered JSC VTB Bank, headquartered in St. Petersburg, Russia, and VTB Capital PLC to pay a $5 million penalty for executing fictitious and noncompetitive block trades in Russian Ruble/U.S. Dollar (RUB/USD) futures contracts.  CFTC

May 24, 2016

The SEC obtained a court order to freeze the profits of Nauman A. Aly, a trader in Pakistan, who allegedly made more than $425,000 in profits by manipulating a technology stock through false company filings.  The SEC alleges that Aly filed a form 13D on the SEC’s Edgar system falsely stating that his group of investors had purchased a 5.1% beneficial ownership of Silicon Valley-based Integrated Device Technology (IDT) and had offered to acquire all of the company’s shares for a price that represented a 65 percent premium.  The market reacted quickly to the filing and IDT’s stock price increased by more than 25% in less than 10 minutes.  Aly then sold all of his IDT call options for an illicit profit of more than $425,000.  The asset freeze ensures that Aly cannot withdraw the $425,000 from his U.S.-based account.  SEC