Among recent enforcement actions, StockCross Financial Services, Inc., owned by the husband of former “Real Housewives of Beverly Hills” star Carlton Gebbia’s husband, was fined $800,000 by FINRA for naked short selling.
In addition, a brokerage firm and its affiliate agreed to pay $20.3 million to settle SEC charges of operating a secret trading desk and misusing dark pool subscriber trading information, and the agency charged a former software executive with violating the Foreign Corrupt Practices Act (FCPA).
Naked Shorts Nail “Housewives” Family Firm
FINRA has fined StockCross Financial Services, owned by the husband of former “Real Housewives of Beverly Hills” star Carlton Gebbia, $800,000 after the agency found the firm had engaged in naked short selling.
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FINRA found that StockCross, which is run by Carlton’s husband David Gebbia, David’s father and two brothers failed to deliver, for seven or more consecutive days on approximately 1,826 occasions, stocks it had sold short without first borrowing or arranging to borrow them. It also did not borrow or arrange to borrow securities for at least 4,132 short sales that it executed.
FINRA found the firm’s system to monitor and track its closeout obligations was “fundamentally flawed.” It also found that the firm’s supervisory system was inadequate to achieve compliance. The problems persisted for more than three years.
While the firm neither admitted nor denied the charges, it consented to FINRA’s sanctions.
ITG, AlterNet Securities to Pay $20.3 Million on SEC Charges
Brokerage firm ITG Inc. and its affiliate AlterNet Securities have agreed to pay $20.3 million to settle SEC charges that they ran a secret trading desk and misused confidential trading information of dark pool subscribers.
According to the agency, ITG told the public that it was an “agency-only” broker, with interests that did not conflict with those of its customers. Instead, however, the firm operated an undisclosed proprietary trading desk known as “Project Omega” for more than a year.
In addition, although ITG claimed to protect the confidentiality of its dark pool subscribers’ trading information, during an eight-month period Project Omega accessed live feeds of order and execution information of its subscribers and used it to implement high-frequency algorithmic trading strategies, including one in which it traded against subscribers in ITG’s dark pool called POSIT.
Project Omega traded a total of approximately 1.3 billion shares, including approximately 262 million shares with unsuspecting subscribers in ITG’s own dark pool. Its algorithmic trading strategy, called the “Facilitation Strategy,” executed trades based on a live feed of information concerning orders that its sell-side subscribers sent to ITG’s algorithms for handling.
Project Omega accessed the feed via a software utility used by ITG’s sales and support teams. The utility provided Project Omega a real-time view of subscriber orders placed through ITG’s algorithms. From April to December 2010, the Facilitation Strategy was designed to detect open orders of sell-side subscribers that ITG handled. Project Omega opened positions based on that information, in displayed markets on the same side of the market as the detected orders, and then closed these positions in POSIT by trading against the detected orders. In that way, Project Omega tried to capture the full “bid-ask spread” between the National Best Bid and Offer (NBBO).
Project Omega had access to POSIT subscribers’ identities, and used this information to identify sell-side subscribers and trade with them in the dark pool in connection with the Facilitation Strategy. In addition, to earn the full “bid-ask spread” in connection with the Facilitation Strategy, Project Omega needed subscribers it traded with in POSIT to be configured to trade “aggressively,” so that they would “cross the spread” to trade with Project Omega. Project Omega made sure the sell-side subscribers were configured to trade aggressively in POSIT.
Another primary strategy, called the “Heatmap Strategy,” involved trading on markets other than POSIT based on a live feed of confidential information relating to customer executions in other dark pools. Based on customer executions, Project Omega’s Heatmap algorithm was designed to open positions in specific securities in displayed markets at the bid or the offer and then close them at midpoint or better in the external dark pools where customers had received midpoint executions. The goal of this strategy was to earn a “half spread” or better based on knowledge of ITG customers’ executions.
ITG agreed to admit wrongdoing and pay disgorgement of $2,081,034 (the total proprietary revenues generated by Project Omega) plus prejudgment interest of $256,532 and a penalty of $18 million that is the SEC’s largest to date against an alternative trading system. The investigation is continuing.