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September 30, 2016 at 06:50 AM
Among recent enforcement actions by the Securities and Exchange Commission were a penalty of $12.5 million against Merrill Lynch for trading controls failures that led to mini-flash crashes.
In addition, the agency imposed a $140 million penalty on an oil services company for accounting fraud; fined and censured a fund manager for illegal cross-trading and principal trading; charged a chief executive officer and a boiler room operator with fraud; and charged Peruvian traders using overseas accounts with insider trading.
Merrill Lynch Fined $12.5M for Mini-Flash Crashes
Merrill Lynch has agreed to pay a $12.5 million penalty for maintaining ineffective trading controls that failed to prevent erroneous orders from being sent to the markets and causing mini-flash crashes.
According to the SEC, an investigation found that Merrill Lynch caused market disruptions on at least 15 occasions from late 2012 to mid-2014, and violated the Market Access Rule because its internal controls that were supposed to prevent erroneous trading orders were set at levels so high that it rendered them ineffective.
For example, Merrill Lynch applied a limit of 5 million shares per order for one stock that only traded around 79,000 shares per day. Other trading strategies had limits set as high as 25 million shares, which Merrill Lynch reduced to 50,000 shares after the SEC’s investigation began.
The erroneous orders passing through the firm’s internal controls caused some stock prices to plummet and then suddenly recover within seconds. Among the mini-flash crashes were 99% drops in the stocks of Anadarko Petroleum Corp. on May 17, 2013, and Qualys Inc. on April 25, 2013. Another order led to a nearly 3% drop in Google’s stock in less than a second on April 22, 2013.
The SEC also found that Merrill Lynch violated the Market Access Rule’s requirement for annual CEO certifications in 2013 and 2014. Merrill Lynch has consented to the SEC’s order without admitting or denying the findings.
Oil Services Company to Pay $140 Million on Accounting Fraud Charges
Oil services company Weatherford International has agreed to pay a $140 million penalty to settle charges that it inflated earnings by using deceptive income tax accounting. Two of the company’s senior accounting executives at the time have agreed to settle charges that they were behind the scheme.
According to the SEC, Weatherford fraudulently lowered its year-end provision for income taxes by $100 million to $154 million each year so the company could better align its earnings results with its earlier-announced projections and analysts’ expectations.
James Hudgins, who served as Weatherford’s vice president of tax, and Darryl Kitay, who was a tax manager, made numerous post-closing adjustments to fill gaps and meet its previously disclosed effective tax rate (ETR), which is the average rate that a company is taxed on pretax profits.
Weatherford regularly touted its favorable ETR to analysts and investors as one of its key competitive advantages, and the fraud made it look as if Weatherford’s designed tax structure was far more successful than it really was. As a result, Weatherford had to restate its financial statements on three occasions in 2011 and 2012.
Weatherford, Hudgins, and Kitay consented to the SEC’s order without admitting or denying the findings that they violated antifraud provisions of federal securities laws. Weatherford must pay the $140 million penalty, Hudgins must pay $334,067 in disgorgement, interest and penalty and Kitay must pay a $30,000 penalty.
Hudgins is barred from serving as an officer or director of a public company for five years, and Hudgins and Kitay are suspended from appearing and practicing before the SEC as accountants, which includes not participating in the financial reporting or audits of public companies. The order permits Hudgins and Kitay to apply for reinstatement after five years.
The SEC’s investigation is continuing.
Aviva Investors Censured, Fined on Illegal Cross-Trading, Principal Trading
The SEC has fined Aviva Investors Americas, LLC, a successor entity to Aviva Investors North America, Inc., a total of $250,000. It has also censured the firm, which has neither admitted nor denied the charges arising out of its failure to adopt and implement adequate policies and procedures to prevent unlawful cross and principal trading by its trading personnel.
According to the agency, beginning in March 2010 and through December 2011, AINA, a registered investment advisor to various clients, arranged cross-trade transactions in which three of AINA’s traders sold fixed-income securities from certain AINA advisory client accounts to counterparty broker-dealers, and then bought them back the next day from the same broker-dealers for the accounts of certain other AINA advisory clients.
