SEC Charges of Failure to Supervise by BD Heading For Hearing
Typically broker-dealers and other regulated entities resolve Commission investigations prior to the institution of any proceedings. A west coast broker-dealer alleged to be a recidivist, however, chose not to resolve failure to supervise claims by the agency that are alleged to stem from years of manipulative conduct by one of its registered representatives whose business partner is a part owner of the firm. The case will be set for hearing. In the Matter of Wedbush Securities, Inc., Adm. Proc. File No. 3-18411 (March 27, 2018).
Los Angeles based Wedbush was founded in 1995. It registered with the NASD as a broker-dealer. Later the firm registered with the Commission as a broker-dealer and investment adviser. Twice in recent years the firm has been charged with violations of the federal securities laws. First, in June 2014 the firm was charged by the Commission with violations of Exchange Act Rule 15c-3-5 for providing market access to certain international traders in the absence of appropriate controls. The firm settled, agreeing to take certain remedial steps while Paying a $2.44 million penalty. Second, in February 2018 the firm settled charges that it violated Exchange Act Sections 15(c)(3) and 17(a)(1) by agreeing to retain an independent compliance consultant and pay disgorgement and a $1 million penalty.
This proceeding centers on the firm’s failure to supervise registered representative Timary Delorme (see below). Ms. Delorme has been with the firm for over 30 years and is partners with one of its partial owners. In 2009 Ms. Delorme’s front-line supervisor conducted a review of trading and customer portfolios as part of an overall analysis of those he supervised. Although the supervisor had concerns about the quality of the penny stocks in the customer accounts and limited her trading in the last hour of the day as well as in certain penny stocks, he tried to be “gentle” with her because of her ties to firm ownership.
In 2012 the supervisor reviewed an e-mail between Ms. Delorme and a customer. The e-mail outlined deals involving the customer, Zirk Englebrecht and others about the efforts to inflate the price of penny stocks, many of which were held in accounts at Wedbush and by customers of Ms. Delorme. In 2014 Mr. Englebrecht was charged by the Commission with violating the antifraud and registration provisions of the federal securities laws. Mr. Engelbrecht eventually pleaded guilty in the criminal case to one count of conspiracy to commit securities fraud, two counts of securities fraud, and four counts of wire fraud. Mr. Engelbrecht had engaged in pump-and-dump schemes. He is currently serving a sentence of 151 months in prison. Although Ms. Delorme continued to participate in the scheme after the date of the e-mail, the firm did not restrict her activities.
At about the same time as the e-mail, Ms. Delorme and Wedbush were named as respondents in two FINRA customer arbitrations. The first, brought by four customers, alleged that the representative had solicited their investments in certain penny stocks, guaranteed no losses, gifted securities, set up a deal between her customer and an associate of Mr. Engelbrecht, and was involved in manipulative trading to guarantee profits. The complaint was reviewed by a number of firm personnel including the president who initialed it. The second matter, filed latter in 2012, was similar. The actions were settled with Ms. Delorme paying half the settlement amounts. The firm deemed her culpable for her behavior.
By year end 2012 Wedbush had received inquiries from FINRA’s Office of Fraud Detection and Market Intelligence into trading in a specific penny stock by three accounts held by Ms. Delorme and her husband. FINRA also made a number of inquiries about the customer arbitrations noted above. While compliance and legal at Wedbush each conducted an inquiry, both were flawed. Both lacked process and failed to document the scope of the inquiry or its results. It is “unclear what, if anything, was reported from legal or compliance to Wedbush’s management,” according to the Order. Ms. Delorme was placed on heightened supervision for one year in March 2014 but it appears this was instituted in order to resolve the FINRA matter noted above. In fact, Wedbush has no documentation reflecting who decided on Ms. Delorme’s discipline, the reason the heightened supervision was appropriate or the timing of the discipline.
The Order alleges that Wedbush’s “policies and supervisory systems lacked any reasonable coherent structure to provide guidance to supervisors and other staff for investigating possible facilitation of market manipulation by registered representatives . . .” This lack of reasonable policies and procedures resulted in a failure to supervise Ms. Delorme. The Order alleges a failure to supervise with a view to preventing and detecting Ms. Delorme’s violations of Securities Act sections 17(a)(1) and (3) and Exchange Act sections 9(a)(2) and 10(b). The proceedings will be set for hearing. See also In the Matter of Timary Delorme, Adm. Proc. File No. 3-18410 (March 27, 2018)(registered representative consented to entry of a cease and desist order based on Securities Act section 17(a) and Exchange Act sections 9(a)(2) and 10(b) tied to manipulation claim, bar from the securities business and a penny stock bar, and payment of a $50,000 civil penalty).
Program: Insights Into SEC Enforcement, is roundtable discussion of the Former Directors of the SEC’s Division of Enforcement that will be held on April 3, 2018 beginning a 4:30 p.m. at Georgetown University Law School. The program will be followed by a reception. Registration is available here without charge. The program is sponsored by the SEC Historical Society, the Federal Bar Association, and the Association of SEC Alumni.