Among recent enforcement actions by FINRA were a fine and sanction against a firm and individual over compliance and supervision issues; against another firm for supervisory failures; and against another for overstating its advertised trade volume.

In addition, the SEC charged a hedge fund firm and a senior research analyst over failure to prevent insider trading and obtained a settlement from another company over a stock picking game.

Company Charged by SEC in Stock Picking Cellphone Game

New York-based Forcerank LLC has been charged by the SEC, or Securities and Exchange Commission, with illegally offering complex derivatives products to retail investors through mobile phone games that were described as “fantasy sports for stocks.”

According to the agency, an SEC investigation found that Forcerank failed to file a registration statement for what constituted a security-based swap offering, and the company also failed to sell the contracts through a national securities exchange.

Forcerank ran mobile phone games where players predicted the order in which 10 securities would perform relative to each other. Players won points and some received cash prizes based on the accuracy of their predictions. Forcerank kept 10% of the entry fees and obtained a data set about market expectations that it hoped to sell to hedge funds and other investors. Forcerank’s agreements with players were security-based swaps because they provided for a payment that was dependent on an event associated with a potential financial, economic, or commercial consequence and based on the value of individual securities.

Without admitting or denying the charges, the company agreed to the SEC’s sanctions and to pay a $50,000 penalty.

Hedge Fund Firm, Supervisor Charged by SEC

San Francisco-based Artis Capital Management and senior research analyst Michael Harden have agreed to settle with the SEC over charges related to their failures to detect insider trading by one of their employees.

According to the agency, Artis Capital Management failed to prevent insider trading at the firm, while Artis Capital and Harden, the employee’s supervisor, failed to respond appropriately to red flags that should have alerted them to the misconduct.

The employee, Matthew Teeple, was later charged, along with his source David Riley; Teeple and Riley also were charged by criminal authorities and have since received prison sentences.

Without admitting or denying the charges, Artis Capital agreed to settle by disgorging the illicit trading profits that Teeple generated for the firm totaling $5,165,862, plus interest of $1,129,222 and a penalty of $2,582,931, while Harden agreed to pay a $130,000 penalty and is suspended from the securities industry for 12 months.

FINRA Fines Firm, Suspends Individual

FINRA, or Financial Industry Regulatory Authority, has censured Robert W. Baird & Co. Incorporated and fined the firm $200,000, and suspended Rolf Parker Griffith III and fined him $5,000, after it said that they did not reasonably supervise a former registered representative’s misuse of customer funds.

According to the agency, Griffith, who was the registered representative’s direct supervisor, did not reasonably follow up on red flags associated with a trade correction request submitted by the registered representative that should have alerted him to the misuse of customer funds.

In addition, Griffith failed to follow some of the firm’s written supervisory procedures (WSPs) relating to trade corrections which would have prevented the misuse of funds. He failed to follow up on the red flags, instead taking the uncorroborated word of the representative that a customer was willing to pay above market value for the stock and accept an unrealized loss of more than $34,000 as a result of the representative’s error.

Against the firm’s procedures, Griffith approved the trade correction request when the resulting correction allocated the trade loss to the customer rather than the firm or the representative, and failed to document the reasons for, or details surrounding, the trade correction. After it became clear that the customer did not agree to purchase the stock at above market value, the firm reimbursed the customer for the loss.

The firm also failed to have a supervisory system, including WSPs, regarding trade errors that would have achieved compliance. The firm’s WSPs for handling trade corrections were vague and ambiguous, and firm supervisors did not understand how to interpret or apply the procedures.

Without admitting or denying the findings, each consented to the sanctions.

FINRA Fines, Censures Firm on WSPs

Essex Radez LLC was censured by FINRA and fined $210,000 after the agency found that it failed to transmit ROEs to OATS under certain firm Market Participant Identifiers (MPIDs), and reported ROEs to OATS that contained inaccurate, incomplete or improperly formatted data.

According to FINRA, the firm reported transactions to the FINRA/NASDAQ Trade Reporting Facility (FNTRF) with an incorrect capacity code, and executed short sale transactions and failed to report each such transaction to the FNTRF with a short sale modifier. The firm also failed to provide for supervision, including adequate WSPs, that would have achieved compliance, as well as failing to have written policies and procedures to prevent the execution or display of a nonexempt short sale in a security subject to a short sale circuit breaker at a price at or below the National Best Bid.

The firm neither admitted nor denied the findings, but consented to the sanctions.

Firm Fined on Trade Volume Overstatements

Evercore Group L.L.C., successor to International Strategy & Investment Group LLC, was censured by FINRA and fined $140,000 after the agency said it overstated its advertised trade volume in securities through Bloomberg L.P., which resulted in an overstatement of 5,680,374 shares.

According to the agency, the overstatements ranged from lows of approximately 1% of the firm’s executed trade volume in many instances to over 100% in some instances. The overstated advertised trade volume resulted from problems related to the implementation of a new order management system (OMS) at the firm. These issues included a transitional period related to the new OMS, a lack of training for the traders using the new OMS, and subsequent adjustments to the OMS that caused the firm to automatically advertise certain trade volume that was also manually advertised.

FINRA also said that Evercore failed to have a supervisory system that would have achieved compliance with accuracy requirements for the firm’s advertisements of executed trade volume.

The firm neither admitted nor denied the findings, but consented to the sanctions.

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