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Regulation and Compliance > Federal Regulation > FINRA

SEC, FINRA Enforcement: Former 'Real Housewives' Husband Fined for Naked Short Selling

By Marlene Y. Satter

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Click to view full PDFAmong 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.

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.

SEC Hits Former Software Exec on FCPA Violations

Vicente Garcia, the former vice president of global and strategic accounts for SAP SE, has agreed to settle after he was charged by the SEC with violating the FCPA by bribing Panamanian government officials through an intermediary to procure software license sales.

According to the agency, Garcia put together a scheme to pay $145,000 in bribes to one government official and promised to pay two others to obtain four contracts to sell SAP software to the Panamanian government.

The scheme lasted from 2009 to 2013. The way it worked meant that SAP, which is headquartered in Germany and executes most of its sales through a network of worldwide corporate partners, ended up selling software to a partner in Panama at discounts of up to 82%. Huge discounts on one end of the deal resulted in huge profits for the partner on the other end, which went into a slush fund that was then used to pay off Panamanian officials so that they would buy SAP’s software—and also kicked back to Garcia, right into his bank account.

Garcia used approval forms with phony reasons for the discounts to sneak the deal through SAP’s internal controls. He used both personal and SAP e-mail accounts to work the scheme, even identifying Panamanian officials and the amounts of money necessary to pull it off.

Garcia consented to the entry of the SEC’s cease-and-desist order, and agreed to pay disgorgement of $85,965, which is the total amount of kickbacks he received, plus prejudgment interest of $6,430 for a total of $92,395.

The SEC’s investigation is continuing. In a parallel action, the U.S. Department of Justice has also announced a criminal action against Garcia.

SEC Announces Settlement on Real Estate Fraud

Three Maryland men, James Glover, Sherman Hill and Cory Williams, have agreed to settle with the SEC on charges that they defrauded investors in a company that owns and operates residential and commercial real estate. Boston-based Signator Investors Inc. and one of its supervisors, Gregory Mitchell, agreed to settle separate charges that they failed to supervise two of the men who worked in Signator’s Maryland office.

According to the agency, Glover orchestrated the fraud by enticing family, friends, and fellow church members to become his clients at Signator and invest in Colonial Tidewater Realty Income Partners, which he co-managed with Hill. Most of Glover’s clients were financially unsophisticated and relied on him for investment guidance, the agency said. Some even described him as “another dad” or “part of the family.”

Glover steered approximately 125 clients to purchase partnership units in Colonial Tidewater, while he and Hill provided phony written statements about its value and financial condition. Glover also lied to investors about the liquidity of Colonial Tidewater’s investments and the expected returns.

Glover and Williams, his business partner in Signator’s Maryland office, never told clients that they got undisclosed commissions from Colonial Tidewater when clients invested in the company, thus failing to disclose conflicts of interest. And to top it off, Glover misappropriated hundreds of thousands of dollars of investor funds.

Signator and Mitchell failed to identify and prevent the fraud, while Signator lacked reasonable policies and procedures concerning consolidated reports. Glover, without Signator’s knowledge, inserted clients’ Colonial Tidewater holdings into the consolidated reports to create the false impression that Colonial Tidewater was a Signator-approved investment when it was never authorized for sale by Signator representatives.

Rather than following Signator’s policies and procedures, Mitchell usually let Glover and Williams choose client files for his review, or he gave them a preselected list of names of client files to be reviewed. That let them delete all references to Colonial Tidewater investments before Mitchell reviewed the records.

Without admitting or denying the allegations, Colonial Tidewater, Glover, and Hill agreed to settle with the SEC, and consented to the appointment of a receiver to take control of Colonial Tidewater. Under settlements that are subject to court approval, Colonial Tidewater would be required to pay $527,844 in disgorgement, $66,542 in prejudgment interest, and a $725,000 penalty. Glover agreed to be barred from the securities industry and pay $839,128 in disgorgement, $64,977 in prejudgment interest, and a $450,000 penalty. Hill agreed to pay a $75,000 penalty.

In a separate SEC order, Williams also agreed to settle without admitting or denying the charges. He will be barred from the securities industry and pay $94,191 in disgorgement, $9,854 in prejudgment interest, and a $94,191 penalty. Signator and Mitchell agreed to pay penalties of $450,000 and $15,000, respectively, without admitting or denying the SEC’s findings. Signator agreed to be censured and Mitchell agreed to be suspended from acting in a supervisory capacity for one year. Funds collected from all the parties will go into a Fair Fund for injured investors.

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