by T. GormanPosted on Posted in SECActions

Automated trading, alternative trading venues, high speed trading, the proliferation of order types and dark pools have been discussed in news articles and popular literate. The Commission has brought enforcement actions involving dark pools, alternative trading venues and order types, frequently tied to a failure to protect proprietary customer data or disclosure issues. The latest case brought by the agency in this area centers on a proprietary order routing system that was supposed to analyze order routing data to prioritize venues and, when coupled with other data, aid venue selection for clients placing trades. The system did that, according to the SEC, but not in the manner told to clients. In the Matter of Deutsche Bank Securities Inc., Adm. Proc. File No. 3-17730 (December 16, 2016).

Deutsche Bank, the broker-dealer – investment adviser affiliate of the international banking giant, has smart order routers known as SuperX+. It primarily routes orders to dark pools and some non-displayed orders to exchanges. In connection with this routing system Deutsche Bank began marketing a component of SuperX+ called the “Dark Pool Ranking Model,” or DRPM. The component was designed to assist in measuring the performance of potential trading venues. The system was supposed to measure the price movement from the time an order was routed to execution. Based on this information, the component ranked venues. The ranking was then combined with other data which measured the probability of execution based on historical information. In essence, DPRM Rankings determined if the venue was eligible to receive an order while the probability of fill determined if the venue would receive an order.

Deutsche Bank touted DPRM to clients and potential clients in conjunction with SuperX+. In some statements the firm touted it as the “quantitative core of [SuperX+]” while others noted that the tool was “a sophisticated dark pool ranking model that profiles dark pools” based on a variety of data. Since the data used for the rankings had to be updated periodically to be effective, the DPRM component was designed to periodically update its information.

Despite the necessity of updates, from December 20, 2011 through February 19, 2013 Deutsche Bank did not update the DPRM Rankings and the fill probability calculations. Clients were not told about the lack of updates – the firm did not tell them that potentially stale information was used in its routing system for millions of trades.

Clients were also not told that when SuperX+ was connected to seven new venues during the same period the rankings supposedly done by DPRM were determined subjectively by firm personnel rather than by the component. This is because there was no historical data available regarding the venues as required by DPRM to generate its rankings. Indeed, in some instances Deutsche Bank overrode the DPRM determinations such as when its own dark pool venue was given a low ranking which excluded it from receiving orders. While Deutsche Bank continued to tout DPRM, and the firm managed to update the data for the component in February 2013 – but the standard procedures were not followed — over a year long period beginning in February 2013 there were no new calculations of rankings or fill probability. In fact, the firm did not successfully update the component until 2014.

In February 2014 Deutsche Bank implemented a new statistical methodology for calculating the DPRM Ranking. The new method was based on price changes for orders routed by Deutsche Bank to the venue. A few months later the firm discovered the reason for its difficulties with updating the component. The systems had corrupted the data input for the DPRM and made it impossible for the firm’s computers to process the proper execution quality data.

Finally, beginning prior to the difficulties with DPRM, and continuing until early 2015, Deutsche Bank also failed to attach a copy of the SuperX subscriber manual and other materials to its Form ATS as required. The Order alleges violations of Securities Act Section 17(a)(2) and Rule 301(b)(2) of Regulation ATS.

In resolving the proceeding the Commission considered the remedial efforts of the firm. Deutsche Bank admitted the facts on which the Order was based and consented to the entry of a cease and desist order based on the Section and Rule cited as well as to a censure. In addition, the firm will pay a penalty of $18.5 million.

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by T. GormanPosted on Posted in SECActions

The Commission filed four actions last week. One action centered on a cherry picking scheme; a second focused on an adviser that failed to follow its own procedures regarding conflicts; a third involved an investment adviser who made repeated misrepresentations to three clients regarding the value of their accounts; and the fourth was based on the manipulation of dozens of exchange traded stocks, yielding $26 million in profits.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 2 civil injunctive cases and 2 administrative proceedings, excluding 12j and tag-along proceedings.

Cherry picking: In the Matter of TPG Advisors LLC, Adm. Proc. File No. 3-17217 (December 15, 2016) names as Respondents TPG, formerly a registered investment adviser, and Larry Phillips, the firm’s sole owner, principal and CCO. Over a four year period Respondents engaged in a cherry picking scheme in which profitably trades were allocated to one set of accounts while those which were unprofitable were allocated to others. The Order alleges violations of Advisers Act Sections 206(1), 206(2) and 207. To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Mr. Phillips is also barred from the securities business and from participating in any penny stock offering. Any reapplication for association is governed by the laws applicable to that process. Respondents will pay, on a joint and several basis, a penalty of $300,000.

Procedures: In the Matter of New Silk Route Advisors, L.P., Adm. Proc. File No. 3-17722 (December 14, 2016) is a proceeding which names the registered investment adviser as a Respondent. The adviser manages two private equity Funds. Beginning in 2008, and continuing to 2014, the Funds invested in over $250 million in four portfolio companies managed by Adviser A which was co-founded by, and had the same CEO as, New Silk Route. The LPA for each fund required that such investments be approved by the Funds’ advisory board in view of the conflict. They were not. The order alleges violations of Advisers Act Sections 206(2) and 206(4). To resolve the proceeding the adviser undertook certain remedial acts and consented to the entry of a cease and desist order based on the Sections cited in the Order as well as to a censure. Respondent will, in addition, pay a penalty of $275,000.

Misrepresentations: SEC v. Cody, Civil Action No. 1:16-cv-12510 (D. Mass. Filed December 12, 2016). Richard Cody is an investment adviser and a former broker representative. In 2009 he formed Boston Investment Partners, LLC. By the end of 2015 he had about 100 advisory accounts with over $14 million in assets under management. From 2004 to the present Mr. Cody is alleged to have made misrepresentations to three clients regarding the value of their retirement accounts. During the period the value of the three accounts declined substantially. Mr. Cody did not tell the three clients that fact. To the contrary, Mr. Cody continually told the clients that their accounts were fine. He took various steps to conceal the real value of their accounts such as stating that withdrawals were not possible at certain points and even transferring in funds from other sources when there were insufficient funds for a distribution. In 2008 FINRA brought an action against Mr. Cody. It alleged that he engaged in unsuitable and excessive trades. That action went to hearing. Ultimately Mr. Cody was suspended in a decision upheld on appeal. The Commission’s complaint does not specify the reason the three accounts declined in value, stating only that Mr. Cody concealed that fact. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The action is pending. See Lit. Rel. No. 23702 (December 13, 2016).

Manipulation: SEC v. Taub, Civil Action No. 2:16-cv-09130 (D. N.J. Filed December 12, 2016). Defendant Joseph Taub directed a manipulative scheme with assistance from defendant Elazar Shmalo. It began in January 2014 and continued through the end of 2015. During that period the defendants controlled 36 accounts at nine brokerage firms. Generally, exchange listed securities were traded in a coordinated fashion with one account being the “winner” and the other the “helper.” Typically the defendants would trade two accounts in coordination on the same day using the same exchange traded stock which was thinly traded. The helper account would place multiple buy (or sell) orders to create the appearance of upward (or downward) pressure on the stock price; the price would move up (or down). The winner account would primary place large buy (or sell) orders executed at the artificial prices generated by the helper account. The process would then be reversed. The defendants repeated this processed at least 23,000 times during a one year period for 2,000 stocks yielding about $26 million in profits. About 20% of the time small losses averaging about $600 per event resulted. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The action is pending. The U.S. Attorney’s Office brought a parallel criminal action.

Australia

Suitability: The Australian Securities Investment Commission banned Keira Keegan, a financial adviser and representative at Protect Ensure Pty Ltd. from the industry for three years. The regulator found that Ms. Keegan recommended that clients invest in firm financial products without informing them that they were high risk instruments.

Hong Kong

Unauthorized trading: The Securities and Futures Commission banned account executive Poon Kin Lung of Philips Securities (Hong Kong) for two years for unauthorized transactions in client accounts. Specifically, he entered transactions in client accounts without proper authorization. Although he had a degree of discretion the clients had not executed forms giving him discretionary authority. The firm also prohibited such accounts.

Prohibited transactions: The SFC revoked the licenses of Goodscape Securities and two of its responsible officers, Tang Lin Sun and Chang Siu Ming. The regulator found that the firm, which was prohibited from holding client assets and was required to execute all client transactions through an executing broker, failed to transmit the trade instructions and withdrew client cash or transferred it to the personal bank accounts of Mr. Tang or his wife. The actions were concealed from the clients by furnishing them with false documents. Messrs. Tang and Chang are prohibited from re-entering the business for, respectively, life and three years.

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