Securities Lawyer Blog

Recently, the Securities and Exchange Commission (SEC) announced that it is has charged ICAP Securities USA LLC (ICAP) with both fraud and material misrepresentations to customers. This firm is the US subsidiary of ICAP which is located in the United Kingdom and is the world's largest inter-broker dealer.

The SEC is sending another big message to the industry in this matter.

The firm is in the business of matching buyers and sellers in over-the-counter markets for a variety of securities. These include mortgage-backed securities and U.S. Treasuries. Customers are able to review trade information on computer screens and the SEC notes that inter-dealer brokers that show higher volume of trading activity are often able to secure more commissions and trades than those that show less activity.

In this case, SEC enforcement found that brokers on ICAP's U.S. Treasuries desk "displayed fictitious flash trades also known as "bird" trades on ICAP's screens and disseminated false trade information into the marketplace in order to attract customer attention to its screens and encourage actual trading by these customers. ICAP's customers believed the displayed fake trades to be real and relied on the phony information to make trading decisions."

These charges have now been settled. The settlement requires that ICAP pay $25 million in disgorgement and penalties. In addition to the settlement, five ICAP brokers were charged with aiding and abetting the fraudulent conduct while two senior executives were also charged for failing reasonably to supervise the brokers. These parties will pay penalties to settle the matter.

The SEC's Division of Enforcement, Lorin L. Reisner had some tough talk for the firm stating that "[i]t is essential that ICAP and other inter-dealer brokers refrain from engaging in conduct that discredits their privileged position in the marketplace ... ICAP engaged in deceptive practices that violated the legal and professional standards required of market participants; our action today demonstrates zero tolerance for such conduct."

The alarming activities in which ICAP brokers engaged are stated by the SEC to include such things as: (1) the display of thousands of fictitious flash trades to customers; and, (2) representations to certain customers that its electronic trading system would follow certain protocols that were not in fact followed. These activities were alleged to be false and misleading. The firm and the individuals have settled without admitting or denying the allegations.

The SEC's order also found that ICAP "held itself out as a firm that did not engage in trading that subjected its own capital to risk" which was not true.

Related Web Resources

For more background on SEC enforcement and litigation, please visit the SEC's website.

Continue reading "SEC's Price for Inter-Broker's Bad Behavior? How About $25 Million. " »

It's hard to imagine a better holiday gift than those handed out earlier this week to Broadcom's former executives. The National Law Journal reports that the stock options backdating shareholder suits against Broadcom Corp. could be less viable now that the criminal case against former executives has been dismissed. The Securities Lawyer Blog discussed these cases in an earlier posting.

The defendants are bound to have a more happy holiday season after the rulings from United States District Court Judge Cormac Carney. He had some very harsh words for the government, saying they had "distorted the truth-finding process."

Entering an acquittal after two months of trial for William Ruehle, former Chief Financial Officer, the judge stated that "[f]or these constitutional rights to have true meaning, the government must not do anything to intimidate and improperly influence witnesses. Sadly, they did so in this case." 
The judge also noted evidentiary issues stating that there was "considerable debate" about accounting practices used by Broadcom and many other companies.

Judge Carney also handed down dismissals of the backdating charges against Broadcom co-founder and former CEO, Henry Nicholas and then ordered the government to show cause why an indictment alleging narcotics crimes against Nicholas, should not also be dismissed.

The Securities and Exchange Commission's backdating case against Ruehle, Nicholas, Henry Samueli and David Dull, Broadcom's former general counsel was dismissed without prejudice.


All of this has now put the civil claims against Broadcom co-founders Henry Nicholas and Henry Samueli, former Chief Financial Officer William Ruehle and former General Counsel David Dull in a new light. These cases, a derivative lawsuit and a class action, are currently pending before Judge Manuel Real and are related to the backdating of stock options.

According to the NLJ, the defense attorneys for Ruehle say they " 'are hopeful that the civil plaintiffs revisit their decision to charge Mr. Ruehle in light of the results of the criminal case ... since " '[i]t was clear, following two months of trial, that there was no fraud committed in connection with Broadcom's stock option program.' "

Plaintiffs' counsel appear undeterred, while defense counsel caution that the civil case will be more difficult to prove given Judge Carney's finding of no wrongful intent in the options granting process at Broadcom, among other issues that could make the showing of materiality and scienter very difficult to prove.

Only recently, U.S. District Court Judge Manuel Real granted final approval of a $118 million partial settlement in the derivative action. Judge Real previously issued a stay in the class action pending resolution of the criminal case against Ruehle and Nicholas.

The Securities Lawyer Blog recently noted a tech wreck in the industry when penalties were imposed on Scottrade for its failure to establish and implement an adequate automated anti-money laundering (AML) program to detect and trigger reporting of suspicious transactions.

Now the Financial Industry Regulatory Authority (FINRA) has imposed a large fine on MetLife Securities, Inc., and three of its affiliates New England Securities Corp., Walnut Street Securities, Inc. and Tower Square Securities, Inc. for a different sort of digital-age supervisorial problem.

The fine is based on the firm's alleged failure to establish: (1) an adequate supervisory system for both the review of brokers' email correspondence with the public; and, (2) procedures relating to broker participation in outside business activities and private securities transactions.

The impact of these alleged failures was to allow two MetLife Securities brokers to avoid detection by the firm of their undisclosed outside business activities and private securities transactions. This is alleged to have cost some firm clients millions of dollars.

The firm did some things right. For nearly a decade, there were written supervisory procedures mandating that all securities-related broker emails be reviewed by a supervisor. But the program fell short in that supervisors were not able to directly monitor broker emails. Instead, it fell on the brokers to forward relevant emails to supervisors for review.

Managers were able to spot-check broker computers for emails that had not been forwarded. Brokers could get around this by deleting emails they did not want supervisors to find. Even regular audits were alleged to be ineffective in that did not allow for timely detection of email-forwarding failures.

FINRA found a large cache of emails involving two brokers who were able to engage in outside business activities and private securities transactions without the firm's knowledge because these emails were not forwarded to supervisors.

According to Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement, "Although FINRA's rules afford firms the flexibility to tailor procedures that are appropriate for their particular business models, all firms must have the ability to flag emails that may evidence misconduct. Relying on brokers to provide copies of their own emails to supervisors for review is hardly an effective means to detect such misconduct."

According to FINRA, MetLife Securities' inability to ensure compliance with the email-forwarding requirement caused the inadequate enforcement of the firm's supervisory procedures relating to outside business activities and private securities transactions.

Related Web Resources

For more background on enforcement and BrokerCheck, go to www.finra.org.

Continue reading "Tech Wreck -- $1.2 Million Fine For MetLife Securities" »