Securities Lawyer Blog

Earlier this month, an Illinois trader was suspended by the Financial Industry Regulatory Authority (FINRA) for trading activity that allegedly was intended to manipulate the market. He will be suspended for a period of 16 months and has been fined $175,000. He must also pay restitution of $171,740 for the alleged improper trading activity.

The alleged improper activity involved spoofing in which the trader had over ten undisclosed brokerage accounts used to inflate the price of a security on the NASDAQ. He is alleged to have placed a number of limit orders in small amounts that were intended to raise the National Best Bid or Offer (NBBO) for the particular security. He is then alleged to have executed larger orders for the same security that were intended to take advantage of the inflated NBBO price using a firm that guaranteed that price. When the larger order was completed, the limit orders were cancelled by the trader.

In this matter, the allegations included a claim that the trader "entered over 4,000 small share orders through his trading account at Great Point Capital LLC, his employer, to improve the NBBO for a Nasdaq security." Once the market price was elevated based on this activity, he would enter into a much larger order for the securities that had been the subject of the smaller orders.

Using an undisclosed personal brokerage account, he is alleged to have taken the benefit of the trade and then cancelled most of the original orders that were transacted through the employer's trading account. This pattern was repeated according to FINRA in over 400 trades in which a total of over $170,000 was gained through the improper inflation activity.

The matter was said by FINRA to have been referred to them by NASDAQ's MarketWatch Department which provides real-time surveillance for activity on the NASDAQ Stock Market, NASDAQ OMX BX and the NASDAQ Options Market. It is certainly instructive that the technological advances in monitoring trading activity is one more tool in the hands of regulators and enforcement to ensure that trading is fair and proper.

FINRA has said that it intends to "aggressively pursue disciplinary actions for manipulative trading schemes that undermine legitimate trading activity." Clearly, FINRA has the ability to detect patterns that arise from improper trading activity and is able to uncover this activity even when it is done through non-disclosure of outside brokerage accounts.

The New York firm of Gusrae Kaplan Nusbaum PLLC represents broker-dealers in regulatory and enforcement matters. Our lawyers advise clients and defend industry members in matters involving a broad spectrum of issues before all regulatory entities. Contact our law firm to consult with one of our attorneys.

Recent events have made the public more aware of the potential for losses in investment portfolios. Extreme cases, such as those involving Ponzi schemes, have been well publicized. All investors can be vulnerable to unsound investing, but the aging and elderly are particularly vulnerable and, for that reason, can also be a target of fraud.

The FINRA Investor Education Foundation is now joining up with the Stanford University Center on Longevity to create the Research Center on the Prevention of Financial Fraud. The Research Center will bring together many experts and disciplines, such as those studying fraud, law enforcement and others to deal with this problem.

The good news is that although it is easier for those who are involved in fraud to reach out to vulnerable and uninformed investors, there are more refined ways to detect this activity. As noted in the joint press release issued late last week, fraudulent practices such as Ponzi schemes, online phishing scams and other scams are more widespread given the technologies available to those wanting to cause harm. But the new effort intends to "support and consolidate scientific research and connect this research to practical prevention and detection efforts."

While recognizing that investors of all ages can be at risk for fraud, the reality is that with an aging population, this activity may well increase. Dr. Laura Carstensen, Stanford Professor in Public Policy, Professor of Psychology, and Founding Director of the Stanford Center on Longevity noted that " '[w]ith the Center on Longevity's dedication to preserving financial security throughout our extended life spans, and with the support of the FINRA Foundation's ongoing commitment to protecting individuals from fraud, the new Research Center on the Prevention of Financial Fraud seeks to enhance the financial security of Americans.' " According to Dr. Carstensen, the intention is to "deliver practical, cutting-edge research to policymakers and law enforcement."

The Research Center has lined up an advisory council with expertise across many disciplines, including business, economics and psychology as well as representatives from AARP, the FINRA Foundation and the SEC. The Research Center's first conference will take place in November of this year in Washington D.C. and is entitled: The State and Future of Financial Fraud. Many disciplines are expected to join together at this conference to advance the efforts that will be at the core of the Research Center's work.

The Wall Street law firm of Gusrae Kaplan Nusbaum PLLC was founded over three decades ago by a Chief Attorney of the SEC's New York Enforcement Division. Our firm members include a former General Counsel of the New York Mercantile Exchange, a former General Counsel of an NASD member broker/dealer and a former in-house attorney of an NYSE member broker/dealer, in addition to arbitrators certified by the National Association of Securities Dealers, National Futures Association and the American Arbitration Association.

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Earlier this week, Citigroup Global Markets, Inc, agreed to settle a matter involving alleged supervisory failures with The Financial Industry Regulatory Authority (FINRA). The firm will pay a penalty of $500,000 for its alleged failure to identify the activities of one of its registered sales assistants who is no longer with the firm. The situation is alleged to have taken place over an 8-year period of time and occurred in one of the firm's branch offices, specifically in Palo Alto, California.

FINRA claimed that the employee was involved in misappropriation of 22 customer accounts which amounted to $749,978 in customer funds over this period of time. The activities included falsification of account records and unauthorized customer account trades.

As regulatory and enforcement securities lawyers, we suggest that the facts surrounding this situation are instructive to all firms and broker-dealers to ensure that supervisory lapses do not occur. In this case, the employee is alleged to have taken advantage of "Citigroup's supervisory lapses" at the Palo Alto branch in which elderly and ill customers were targeted. The sales assistant apparently targeted those customers whom she knew would be less likely to read their account statements.

Two years ago, FINRA took action to bar the sales associate from further activities. According to the agency, it is still in the process of investigating others involved in supervising her. Citigroup has paid restitution to the customers involved in these incidents.

In this matter, Citigroup is alleged to have "failed to detect or investigate a series of 'red flags' that upon further inquiry should have alerted the firm to [the assistant's] improper use of customer funds." We have previously posted on the impact of similar failures when firms ignore red flags.

Here, FINRA said these red flags included "exception reports highlighting conflicting information in new account applications and customer account records reflecting suspicious transfers of funds between unrelated accounts." It is also alleged that the firm's systems and controls in supervision and review made it possible for the sales assistant to falsify various records.

Specific instances involved suspicious discrepancies with customer addresses and phone numbers, which the sales assistant tried to explain away to her supervisors. FINRA says the explanation was not reasonable and the firm should have looked further.

FINRA also claims that the firm ignored suspicious activity involving transfers and disbursements in various accounts that the sales assistant was able to access, enabling her to use the funds for her own purposes. She was even able to open an account in her father's name to further her activities with no repercussions from the firm. Her activities also included accounts of deceased customers and others that went undetected by Citigroup, even when red flags were present.

Ensuring proper supervision and compliant systems enables firms to avoid regulatory action. Please contact the experienced securities lawyers at New York's Gusrae Kaplan Nusbaum PLLC, PLLC, for more information about our law practice and how we can support your firm's compliance and provide legal counsel in regulatory and enforcement proceedings.

Over the summer months, many of us welcome house guests. But for one host, a friend's visit became a temptation for insider trading that was recently concluded by regulators.

Last month, the Securities and Exchange Commission (SEC) settled an action against an individual for alleged insider trading in the securities of Brink's Home Security. The individual involved, Mr. Robert Doyle, did not admit or deny the allegations in the settlement. The facts of the case are interesting because Mr. Doyle is alleged to have obtained the information in an unusual way.

The Commission alleged in its complaint, that the defendant had obtained material nonpublic information regarding the buyout of Brink's by Tyco International, Inc. (Tyco) that was to occur. One of the key members of the team evaluating the acquisition by Tyco was an employee of Tyco's investment bank, named "the Banker" in the Commission's Statement of Facts.

The Banker happened to be a friend of the defendant and stayed with him during the Summer of 2009. He had mentioned to the defendant that he was flying on Tyco's corporate jet, but did not say why. While staying at the defendant's home during August 2009, he worked on the a presentation of the acquisition for Tyco. The presentation had identified the acquirer and the target by name, so the identity of the parties was not in doubt. The Banker did not provide the defendant with inside information.

After the Banker happened to leave a copy of the presentation at the defendant's home, which the defendant found in December 2009, he apparently also found the temptation too great. He began trading on the information after learning from the unsuspecting Banker about travel plans that would have tipped off the defendant that the acquisition was imminent. The defendant's insider trading included the purchase of Brink's securities call options, which purchases were alleged to have "breached a legitimate expectation of confidentiality held by the Banker."

As a direct result of the insider trading, the defendant is alleged to have earned $88,555. In the settlement, he is disgorged of these profits, plus $4,288.66 prejudgment interest and civil penalties amounting to $44,277.50. The defendant has also consented to a final judgment permanently enjoining him from violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5.

New York City's Gusrae Kaplan Nusbaum PLLC, represents brokers before all regulatory agencies. Please contact our law firm for a confidential consultation with one our lawyers regarding representation and our litigation and advisory practice. Our highly-respected lawyers have decades of experience and expertise representing broker-dealers.