by T. GormanPosted on Posted in SECActions

Dark pools have been a subject of concern to Congress, the SEC and the public for years. Despite those concerns the pools are used by institutional and other large traders to cloak their trading activity and minimize its market impact. In contrast to the typical securities market where details about the order are publically displayed, dark pools make display little or no information about customer orders.

Now the SEC has brought its first action involving a dark pool. The misrepresentations about the manner in which the pool functioned and the undisclosed conflicts at the center of its operations suggest that the pool was only dark for some traders. In the Matter of Pipeline Trading Systems LLC, Adm. Proc. File No. 3-1460 (Oct. 24, 2011).

The actions named as Respondents Pipeline Trading Systems, LLC, Fred Federspiel and Alfred Berkley. Pipeline is a registered broker dealer and registered alternative trading system or ATS. Messrs. Federspiel and Berkley are, respectively, the founder and CEO and Chairman of Pipeline. The Order alleges violations of Securities Act Section 17(a)(2) and the pertinent rules under Regulation ATS.

Pipeline began operation in 2004 as an alternative trading system. The system operated as a dark pool. It assured potential users that Pipeline’s proprietary system would reduce market impact by denying day traders, predator dealers and other speculators the information they need to front run institutional orders. Customers were told that Pipeline utilized a trading system that was designed to prevent users from uncovering customer order information for the purpose of trading in front of those orders. Pipeline customers were also assured that all were treated equally.

Pipeline represented that it used a “natural” liquidity to fill orders. Such a system excludes trading opportunities generated by a dealer or by the trading venue itself specifically for the purpose of filling a particular customer order. Press releases suggested that rising trading volume on the venue accounted for the increasing number of “natural” trades.

In fact the representations were false and concealed a conflict of interest, according to the Order. The vast majority of the trades executed in the ATS were with Milstream Strategy Group LLC, a wholly owed affiliate of the pool. Milsream operated by trying to anticipate or predict the trading intentions of Pipeline customers. The affiliate would then trade elsewhere in the same direction as customers prior to filling their orders in the pool. Pipeline favored Milstream, and facilitated this trading, by at times making certain proprietary information available to its affiliate. The traders at this affiliate were compensated for giving Pipeline customers favored treatment.

The Respondents resolved the action by consenting to the entry of a cease and desist order based on the sections and rules cited in the Order. In addition, Pipeline agreed to pay a civil penalty of $1 million while Respondents Federspiel and Berkeley each agreed to pay a penalty of $100,000.

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by T. GormanPosted on Posted in SECActions

The SEC and the New York Attorney General settled actions against a major Portuguese Bank based on violations of, respectively, the federal securities laws and the New York Martin Act. The Commission case centers on alleged violations of Securities Act Section 5, Exchange Act Section 15(a) and Advisers Act Section 203(a). The New York case is based on alleged violations of the broker dealer and investment adviser registration provisions of the Martin Act. In the Matter of Banco Expirito Santo S.A., Adm. Proc. File No. 3-14599 (Oct. 24, 2011).

Respondent BES is the principal subsidiary of Espirito Santo Financial Group, a Luxembourg based financial services business. BES is a commercial bank based in Lisbon, Portugal with more than 700 branches throughout the world. The bank does not have branches in the United States. It does however operate a money transmission service inn this country, Espirito Santo e Comercial Lisboa, Inc. or ESCLINC. BES also has a U.S. based wholly-owned subsidiary that is a member of FINRA and has been registered with the Commission as a broker-dealer since at least 2004. Its shares are listed on the Euronext stock exchange.

Beginning in 2004, and continuing through 2009, BES offered and provided brokerage services and investment advise to about 3,800 U.S. residents who were customers of the bank. Generally, those customers were Portuguese immigrants. These services were offered and provided from Portugal. The Departmento de Marketing de Comunicacao & Estudio do Consumdo mailed marketing materials to the bank’s U.S. based customers. A Portugal based call center serviced those customers. ESCLINC, which does have offices in this country, facilitated money transfers. That center also, from time to time, offered brokerage services to U.S. bank customers. None of the persons involved in these activities were registered as broker dealers or investment advisers with either the SEC or the State of New York.

Throughout the period BES offered and sold a variety of securities to its U.S. customers. Those included debt securities issued by entities such as Royal Bank of Scotland, HBOS plc, Lloyds Bank, Prudential, Limited Brands and others. The bank also marketed and sold debt and other group-guaranteed securities issued by BES and its affiliates, interests in Portuguese analogs to mutual funds (typically sponsored by BES or an affiliate), tax advantaged retirement products, and other securities. There was no registration statement filed or in effect for the securities issued or sponsored by BES or its affiliates. Likewise, registration statements were not filed or in effect for most of the other securities BES offered and sold to its U.S. customers.

In 2007 BES identified the need to comply with the laws of the jurisdictions in which it operated. The bank did not however undertake that analysis for the United States. Likewise, it did not use its wholly owned FINRA and Commission registered subsidiary to effectuate the transactions.

In May 2010 the bank self-reported following an internal investigation. Inquiries by the Commission and the State of New York followed. BES settled with the SEC, consenting to the entry of a cease and desist order based on the sections cited in the Order. The bank also agreed to pay disgorgement of $1,650,000 along with prejudgment interest and a civil penalty of $4,950,000. In addition, BES entered into a series of undertakings regarding its U.S. clients. To settle with the State of New York the bank agreed to the entry of a cease and desist order from further violations of the Martin Act along with certain sections of the Executive Law and will offer to make its customers whole for all securities unlawfully sold in addition to disgorging all profits. The bank will also pay a fine of $975,000. The disgorgement will be made to the SEC.

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Each year Lexis takes nominations for and selects the Top 25 Business Blogs. Last year this Blog was honored to be among those selected. If you would like to nomine a blog please use the following link here.

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