SEC Files Fourteen Settled Actions Against Specialists
The SEC filed settled actions against fourteen specialists firms on Wednesday based on claims of improper proprietary trading. Settled civil injunctive actions were filed against six firms in the Southern District of New York. Those firms are Automated Trading Desk Specialists (Cases No. 09-1976), E*Trade Capital Markets (Case No. 09-1976), Melvin Securities (No. 09-1978), Sydan, LP (No. 09-1975) and TradeLink (Case No. 09-1973).
Eight other firms were named as respondents in administrative proceedings. Those firms are Botta Capital Management (File No. 3-13390), Equitec Proprietary Markets (File No. 3-13391), Group One Trading (File No. 3-13392), Knight Financial Products (File No. 3-13393), Goldman Sachs Execution & Clearing (File No. 3-13393), Susquahanna Investment Group (File No. 3-13395 and TD Options (File No. 3-13396).
The complaints in the civil injunctive actions and the administrative orders charge essentially the same improper conduct in which the specialists disregarded their duties and took advantage of their customers. The events in the cases generally focused on the time period 1999 through 2005.
Specialists, according to the SEC’s papers, are responsible for the quality of the markets in the securities in which they are registered. A specialist is obligated to maintain a fair and orderly market insofar as that is reasonable. Their duties include the obligation to execute orders for the public at the most advantageous price and to offset imbalances in supply and demand. Accordingly, specialists act as both a broker and a dealer. In either capacity they must hold the public’s interest above their own.
Here, the SEC claimed the specialists put their interests above that of the public by engaging in thousands of the following types of trades which disadvantaged the public but benefited them:
• Trading ahead: In these instances, the specialists filled one agency order through a proprietary trade for the firm’s account while a matchable agency order was present on the opposite side of the market. The customer order in these instances was disadvantaged when it was later executed at a price that was inferior to that received by the firm’s proprietary account.
• Interpositioning: In these transactions, after trading ahead, the specialist also traded proprietarily with the matchable opposite-side agency order that had been traded ahead of, thereby interpositioning itself between the two agency orders that should have been paired off. This permitted he specialist to capture the spread between the purchase and sales price and disadvantaged the public.
• Trading ahead of unexecuted open or cancelled orders: This occurred when the specialist traded ahead of opposite side executable agency orders, but the unexecuted orders were left open until the end of the day or were cancelled by the customer prior to the close.
The civil complaints also claim that the six specialists named as defendants in those actions failed to keep certain types of required records. Specifically, those firms failed to make or keep current a blotter containing an itemized daily record of all purchases and sales affected by the firms for their proprietary accounts.
The administrative proceedings were based on alleged violations of Section 11(b) of the Exchange Act, Rule 11b-1 thereunder and various exchange rules. The eight firms agreed to settle by consenting to the entry of a cease and desist order and the payment of disgorgement and a civil penalty. In these cases the amount of disgorgement totaled about $22.7 million while the penalties exceeded $4.3 million.
The civil injunctive actions alleged violations of Exchange Act Section 17(a) and Rule 17a-3(a)(1) thereunder and certain exchange rules. Each defendant resolved the action by consenting to the entry of a permanent injunction and the payment of disgorgement and a civil penalty. The total disgorgement paid was approximately $35.7 million, while the penalties totaled about $6.7 million.