The Securities and Exchange Commission recently fined the mayor of Harvey, Illinois, for municipal bond fraud and froze a trader’s assets to prevent him from profiting from a false filing.
In addition, the Financial Industry Regulatory Authority censured and fined a firm for anti-money laundering failures and failures involving its market access business.
Illinois Mayor Settles With SEC on Hotel Bond Fraud Charges
Eric Kellogg, mayor of Harvey, Illinois, has agreed to settle fraud charges from the SEC for his involvement in a scheme that diverted money from municipal bond sales for purposes other than that of the bonds: to develop and construct a Holiday Inn hotel in Harvey.
According to the agency, investors were told that their money would be used to develop and construct a Holiday Inn hotel in Harvey, but instead city officials diverted at least $1.7 million in bond proceeds to fund the city’s payroll and other operational costs unrelated to the hotel project.
Kellogg exercised control over Harvey’s operations and signed important documents the city used to offer and sell the bonds. Based on his control of the city, Kellogg is liable for fraud, the SEC says.
Without admitting or denying the charges, Kellogg agreed to pay a penalty of $10,000 and never participate in a municipal bond offering again. The settlement is subject to court approval.
SEC Wins Asset Freeze Against Trader in False Filing Case
The SEC has gotten a court order to freeze the assets of Nauman Aly after it traced a false regulatory filing in manipulation of a technology stock to a computer in Pakistan.
According to the agency, on April 12 at 11:50 a.m. Eastern time, Aly, of Pakistan, bought 1,850 call options in Silicon Valley-based Integrated Device Technology (IDT) in his U.S. brokerage account for $18,500.
At 12:08 p.m., Aly filed a Schedule 13D form on the SEC’s EDGAR system that claimed his group of six Chinese investors had a 5.1% beneficial ownership of IDT and had sent a letter to the board of directors offering to acquire all of the company’s shares for a price that represented a 65% premium.
The market reacted quickly to the filing, and IDT’s stock price increased by more than 25% in less than 10 minutes. Then, at 12:18 p.m., Aly sold all the options for a profit of $425,000. He then filed another Schedule 13D stating that his group of investors no longer owned more than 5% of IDT after his options sales.
Aly used the same IP address for the options trades that he used to make the false filings, and his group of investors never actually owned 5.1% of IDT, much less contacted IDT to buy all of its shares.
The freeze order prevents Aly from withdrawing from his U.S.-based account the $425,000 in options trading profits made in less than 30 minutes after the false filing. The agency seeks disgorgement, penalties and other related relief.
The investigation is continuing.
FINRA Fines Clearing Firm for Letting Overseas Traders Run Wild
Electronic Transaction Clearing Inc. was censured and fined by FINRA in two separate cases, one involving supervisory and risk management failures in connection with its market access business and the other involving anti-money laundering failures. According to the agency, in the first case, ETC was censured, fined $875,000 (to be paid collectively to FINRA, Nasdaq Stock Market LLC, BATS Exchange Inc., and NYSE Arca Equities Inc., of which $218,750 shall be paid to FINRA) and required to comply with an enhanced supervisory undertaking after FINRA found that the firm did not adequately supervise and manage the risks of its MA business involving thousands of foreign-based traders, and therefore could not monitor, detect and prevent potentially manipulative activity.
ETC failed to monitor numerous red flags and the trading of its MA customers, particularly those who posed heightened risk. FINRA cited numerous other failures, including in detecting and preventing potentially manipulative trades; prompt and decisive follow-up, review and investigation; sufficient and appropriate investment in supervisory technology, compliance infrastructure and compliance staff; and failure to ensure all trading activities were compliant — even in the wake of repeated notice by regulators of potentially manipulative activity from certain of the firm’s MA customers.
In the second case, the firm was censured and fined $125,000 after FINRA determined that it had failed to establish and implement adequate AML policies, procedures, and internal controls. Although the firm identified situations in which traders given direct market access by the firm participated in activity that caused the firm to restrict or prohibit the trader’s trading activity, even when it restricted or prohibited the trader’s trading activity, it took no further action, such as considering or issuing a Suspicious Activity Report (SAR).
Much of the firm’s business came from accounts in which numerous traders used third-party order management system service bureaus to trade for a single account number. When the firm did restrict or prohibit a trader’s trading activity or activity for multiple traders for the same customer, it did not sufficiently consider whether the customer associated with the trader(s) had engaged in suspicious activity. It also failed to have adequate written AML procedures.
The firm neither admitted nor denied the findings but consented to the sanctions.
— Check out Cybersecurity Is SEC’s Top Enforcement Focus, Officials Say on ThinkAdvisor.
SEC wins settlement from mayor on muni bonds, prevents trader’s profits from false filing; FINRA tackles