Among recent enforcement actions, the Securities and Exchange Commission levied its first high-frequency trading manipulation charge, and the Financial Industry Regulatory Authority slapped TD Ameritrade with a $75,000 fine for recordkeeping failures.
In addition, the SEC charged a former financial analyst with insider trading and the New Jersey Bureau of Securities assessed a $1.1 million penalty against a company and its president and CEO for the fraudulent sale of unregistered securities.
SEC Charges High-Frequency Trading Firm With Manipulating Closing Prices
Athena Capital Research was charged by the SEC with placing a large number of aggressive, rapid-fire trades in the final two seconds of almost every trading day during a six-month period to manipulate the closing prices of thousands of NASDAQ-listed stocks. The agency said that this is the first high-frequency trading manipulation case.
Athena was acutely aware of the price impact of its algorithmic trading, calling it “owning the game” in internal emails, the SEC said.
According to the SEC, Athena used an algorithm that was code-named Gravy to engage in a practice known as “marking the close,” in which stocks are bought or sold near the close of trading to affect the closing price.
Although Athena was a relatively small firm, it dominated the market in the last few seconds of a trading day for stocks that it otherwise traded only slightly. In addition, the firm used additional algorithms it called “collars” to be sure that its orders were given priority when trading imbalances at the close of the trading day.
The manipulations occurred from June to December 2009, and made up more than 70% of the total NASDAQ trading volume of the affected stocks in the seconds before the market close.
The huge volumes of these last-second trades allowed Athena to overwhelm the market’s available liquidity and artificially push the market price, and therefore the closing price, in the firm’s favor.
The firm neither admitted nor denied the charges, but agreed to pay a $1 million penalty.
FINRA Fines, Censures TD Ameritrade on Recordkeeping Failures
TD Ameritrade was censured by FINRA and fined $75,000 after it failed to create and maintain a record that it had sent account records containing customer investment objective changes in a timely manner.
According to the agency, a data center conversion negatively affected the software and related automated process for notifying customers of investment-objective changes, which ceased to function properly. As a result, data files containing new or updated customer suitability information failed to route to the firm’s printing vendor. That meant that customer investment objective changes were not sent to approximately 300,000 customers.
The problem was discovered by a technology associate while performing unrelated functions. The data was found residing in an “archive file” located somewhere in the firm’s routing hub system.
FINRA also foumd that although the firm had written supervisory procedures in place, they were not adequate to monitor for and detect problems with the transmission of updated account information to customers.
The firm neither admitted nor denied the findings.
FINRA Censures, Fines Firm; Suspends Supervisor
FINRA censured Source Capital Group Inc. and fined the firm $100,000, and also suspended Russell William Newton and fined him $10,000. The actions were taken over disclosure failures in the case of the firm and supervisory failures in Newton’s case.
According to the agency, the firm, through its branch office manager, sold or caused the sale of investments managed by an entity without adequately disclosing material information to investors.
The entity would occasionally provide money to the branch office manager that he used to pay the firm’s representatives a salary of $2,000 per month in advance of their draws. Meanwhile, the entity’s offering documents failed to disclose this arrangement.
Newton, who was the designated supervisor of the branch manager and the branch, did not supervise the branch and indeed delegated that supervision to the branch manager.
In addition, FINRA also found that two of the firm’s brokers made exaggerated and unfounded promises in multiple emails to customers regarding the oil and gas interests to be acquired by the entity’s partnerships in their efforts to bring in investments in securities for those oil and gas interests.
The firm and Newton neither admitted nor denied the charges. SEC Charges Former Analyst with Insider Trading
The SEC has filed charges against Zachary Zwerko, a former financial analyst at a pharmaceutical company, with insider trading after he allegedly tipped his friend with nonpublic information about potential acquisition targets for his company.
Zwerko, according to the agency, evaluated potential acquisitions. But he also repeatedly accessed confidential files about his employer’s acquisition targets, and then passed along what he found out to a friend from business school. In buying stocks before announcements were made public, the friend made about $683,000 in illegal profits.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York has announced criminal charges against Zwerko. The SEC’s investigation is continuing.
Energy Firm and CEO Get $1.1 Million Penalty on Fraud
Extreme Energy Solutions Inc. (EES) and its president and CEO, Samuel Burlum, have been ordered to pay a $1.1 million civil penalty by the New Jersey Bureau of Securities after the agency found that Burlum and the company engaged in the fraudulent sale of unregistered stock, warrants and promissory notes, and misled investors through false statements and omissions of material fact, among other violations.
According to the agency, Ogdensburg-based EES claims to be a green technology research company as well as an installation facility for emission reduction devices. It offers for sale and installation a device called the SMART Emissions Reducer, formerly known as the InterCharger, that is supposed to reduce automobile emissions and increases motor fuel efficiency.
However, Burlum parlayed his membership in a group called the Global Information Network to find prospective investors. GIM, currently an Illinois-based organization, describes itself as a “unique success club” whose members help each other achieve wealth, gain financial freedom, experience dynamic health, and reach high levels of overall emotional well-being.
In an affinity fraud scheme, from at least March 2011 through August 2014, Burlum and EES sold at least $2.8 million worth of unregistered securities through the fraudulent offer and sale of EES common stock, common stock purchase warrants, and promissory notes to at least 225 investors, many of whom were members of the network.
Investors’ purchases were solicited through false representations about the company’s value, including that it was preparing for an initial public offering and had turned down a $300 million purchase offer.
Burlum and EES have been ordered to pay a $1,125,000 civil penalty.
Check out SEC Brought ‘Record’ 755 Enforcement Actions in 2014 on ThinkAdvisor.