Recent Broker-Dealer Enforcement Actions and Litigation
Securities regulators like FINRA and the SEC have always been watching for market manipulation, but recent violations by firms nationwide demonstrate a renewed sense of vigilance from these regulatory organizations.
Let’s look at some examples of recent cases involving enforcement against broker dealers.
1. Biremis Corp. – Toronto, Canada, July 2012
FINRA expelled Biremis and barred its President and CEO, Peter Beck, for failure to detect and prevent manipulative trading activities, short sale violations, failure to implement an adequate anti-money laundering (AML) program and numerous other securities law violations between 2007 and 2010.
Biremis’ supervisory system failed to include policies and procedures designed to detect and prevent “layering” on U.S. markets. Layering occurs when traders place orders into the market and quickly cancel them to trick others into buying or selling a stock at the artificial price.
In addition, Biremis did not comply with the Bank Secrecy Act by installing an AML. Without any way to monitor for money laundering, Biremis failed to properly detect suspicious activities and file suspicious activity reports. Mr. Beck also appointed an unqualified, untrained AML compliance supervisor and did not provide adequate AML training to employees.
The firm also improperly calculated its net capital and failed to maintain all required emails and instant messages over a five-year period, a clear violation of compliance standards.
2. Hold Brothers On-Line Investment Services – New York, NY, September 2012
The SEC found that this New York-based brokerage firm was a conduit for more than $2.5 million in manipulative trades, money laundering and other violations. The company’s leadership ignored red flags that arose from overseas traders accessing the markets through its customer accounts and illegally manipulating publicly-traded stocks by “layering” or “spoofing” them.
Hold Brothers’ president, CFO and a third executive all should have acted on emails and other indications that these manipulative trading activities were occurring through Hold Brothers’ accounts, but none did.
Two of Hold Brothers’ customers, the foreign companies Trade Alpha Corporate Ltd. and Demostrate LLC, were also charged by the SEC for actually carrying out the manipulative trading schemes using Hold Brothers’ capital. The six individuals and entities charged in the SEC’s case agreed to pay a total of $4 million in disgorgement and penalties to settle the charges.
The SEC estimated that the manipulative trading occurred from January 2009 to September 2010.
3. Gibraltar Global Securities – Bahamas, March 2013
The SEC charged this Bahamian broker-dealer, along with a group of Canadian stock promoters and two San Diego attorneys, with leading a “pump and dump” scheme involving two public companies, Pacific Blue Energy Corporation and Tradeshow Marketing Company, Ltd.
The Canadian stock promoters used false promotions to pump up trading in the stock of the two companies and made millions when they secretly dumped their own shares with the help of the San Diego attorneys who drafted misleading public filings and legal opinions.
According to the SEC, Gibraltar Global Securities provided false affidavits and misleading statements that allowed stock promoters to secretly sell shares of the companies they were promoting. The SEC also charged Gibraltar’s president for signing misleading representations on behalf of the broker dealer.
4. LPL Financial Holdings, Inc. – Boston, Massachusetts, May 2013
FINRA fined LPL Financial Holdings, Inc. $9 million for failure to improve their previously scrutinized email systems.
Securities firms are required to keep all email and other documents as proof of orders and client communication, but FINRA uncovered 35 errors in the firm’s email review system from 2007 to 2013.
According to FINRA, over 28 million emails sent or received by thousands of brokers were not properly reviewed, leaving a number of potential red flags unmonitored.
Additionally, LPL didn’t review or archive about 3.5 million messages sent using Bloomberg terminals in a seven-year period. In 2009, LPL lost access to 280 million emails for five months when they switched to a cheaper email archive provider. These failures resulted in dozens of regulatory matters and customer arbitrations against LPL.
Increased levels of scrutiny from regulatory bodies like the SEC and FINRA require broker dealers to remain vigilant about their compliance and surveillance standards. Leveraging automation technologies to detect illicit trading activities faster and more efficiently can keep a firm from facing punitive action and hefty fines, and avoiding the fates realized in these examples.