http://www.thinkadvisor.com/2017/01/12/citi-returning-225m-in-excess-fees-new-york-attorn?t=the-client?ref=channel-more-news

Citadel Securities LLC has agreed to pay $22.6 million to settle charges that its business unit handling retail customer orders from other brokerage firms made misleading statements to them about the way it priced trades, the Securities and Exchange Commission said Friday.

The SEC’s order finds that Citadel Execution Services suggested to its broker-dealer clients that upon receiving retail orders they forwarded from their own customers, it either took the other side of the trade and provided the best price that it observed on various market data feeds or sought to obtain that price in the marketplace. The process of taking the other side of the trade of the retail orders is known as ”internalization.” 

However, the SEC’s order finds that two algorithms used by Citadel Securities did not internalize retail orders at the best price observed nor sought to obtain the best price in the marketplace. 

“These algorithms were triggered when they identified differences in the best prices on market feeds, comparing the SIP feeds to the direct feeds from exchanges. One strategy, known as FastFill, immediately internalized an order at a price that was not the best price for the order that Citadel Securities observed. The other strategy, known as SmartProvide, routed an order to the market that was not priced to obtain immediately the best price that Citadel Securities observed,” according to the SEC.

Stephanie Avakian, acting director of the SEC Enforcement Division, said that Citadel “made misleading statements suggesting that it would provide or try to get the best prices it saw for retail orders routed by other broker-dealers. Internalizers can’t suggest they are doing one thing yet do another when it comes to pricing trades.”

As a ”wholesale market maker” or ”internalizer” that specializes in handling retail orders from investors who are customers of other broker-dealers, Citadel Securities executes approximately 35% of the average daily volume of retail equity shares traded in the U.S. markets, according to the SEC’s order.

”These two algorithms represented a small part of Citadel Securities’ internalization business, but they nevertheless affected millions of orders placed by retail investors because of Citadel Securities’ large role in that market,” added Robert Cohen, co-chief of the SEC Enforcement Division’s Market Abuse Unit. ”We are focused on the execution of retail orders and encourage investors to ask brokers, and brokers to ask internalizers, how they are determining best prices for retail orders.” 

Citadel Securities has discontinued the two algorithms at issue. Without admitting or denying the findings, Citadel Securities agreed to be censured and pay $5.2 million in disgorgement of ill-gotten gains plus interest of more than $1.4 million and a penalty of $16 million. 

Contractor L3 Technologies Inc. Fined Over Books and Records Failures

The SEC announced that L3 Technologies Inc., a contractor for U.S. and various foreign government agencies, has agreed to pay a $1.6 million penalty to settle charges that it failed to maintain accurate books and records and had inadequate internal accounting controls. 

An SEC investigation found that in December 2013, L3’s Army Sustainment Division (ASD) – part of L3’s Aerospace Systems segment – improperly recorded $17.9 million in revenue from a contract with the U.S. Army by creating invoices associated with unresolved claims against the Army that were not delivered when the revenue was recorded. 

While certain employees immediately reported their concerns to L3’s ethics department, the subsequent ethics review failed to uncover the misconduct due, in part, to a failure by internal investigators to adequately understand the billing process, according to the SEC.

In October 2014, following a subsequent investigation conducted by outside advisors, L3 concluded it had material weaknesses in its internal controls over financial reporting for the fiscal year ended Dec. 31, 2013, and for the first quarter of 2014. L3 revised its financial statements from 2011 to 2014.

“Adequate internal accounting controls function as a critical safeguard against the type of improper revenue recognition that occurred at L3,” Andrew M. Calamari, Director of the SEC’s New York Regional Office, said in a statement. “L3 failed to have such controls in place, which rendered inaccurate its books and records.”

Additional accounting errors in L3’s Aerospace Systems combined with the improper accounting associated with the 69 undelivered invoices had the effect of overstating the company’s pretax income by $169 million.

Without admitting or denying the findings, L3 agreed to pay the $1.6 million penalty and consented to the entry of the SEC’s cease-and-desist order finding that it violated the books and records and internal controls provisions of the federal securities laws. 

 

Port Authority Omitted Risks to Investors in Roadway Projects

The SEC announced that the Port Authority of New York and New Jersey has agreed to admit wrongdoing and pay a $400,000 penalty to settle charges that it was aware of risks to a series of New Jersey roadway projects but failed to inform investors purchasing the bonds that would fund them.

The SEC’s order finds that the Port Authority offered and sold $2.3 billion worth of bonds to investors despite internal discussions about whether certain projects outlined in offering documents, including the Pulaski Skyway, ventured outside its mandate and potentially weren’t legal to pursue. 

The Port Authority is the first municipal issuer to admit wrongdoing in an SEC enforcement action.

SEC Awards $5.5 Million to Whistleblower

The SEC awarded more than $5.5 million to a whistleblower who provided critical information that helped the SEC uncover an ongoing scheme, according to an announcement.

According to the SEC’s order, the whistleblower was employed at the company involved in the wrongdoing and reported the information directly to the SEC, which brought a successful enforcement action to end the scheme. The SEC’s whistleblower program has now awarded approximately $142 million to 38 whistleblowers since issuing its first award in 2012. SEC enforcement actions from whistleblower tips have resulted in more than $904 million in financial remedies.

Private Equity Fund Advisor Fined for Failing to Disclose Potential Conflicts of Interest

The SEC announced that Centre Partners Management, LLC (CPM), a New York City-based private equity fund advisor, has agreed to settle charges that it breached its fiduciary duty to its fund clients and made materially misleading statements to the funds’ investors by failing to disclose potential conflicts of interest.

According to the SEC’s order, CPM did not disclose potential conflicts with a third-party information technology service provider that performed due diligence services for portfolio company investments on behalf of, and paid for by, its fund clients.

However, three of CPM’s principals have personal investments in the IT service provider: Two of CPM’s principals occupy two of the three seats on the service provider’s board of directors and the wife of one of the principals is a relative of the service provider’s co-founder and CEO.

Without admitting or denying the SEC’s findings, CPM agreed to a censure, a cease-and-desist order, and to pay a $50,000 penalty.

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