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Regulation and Compliance > Federal Regulation > FINRA

FINRA, Exchanges Bar Brokerage Firm’s Ex-CEO Over Failure to Prevent Market Manipulation

By Jeff Berman

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The Financial Industry Regulatory Authority, Nasdaq, the New York Stock Exchange and Cboe Global Markets all permanently barred the former CEO of a New York brokerage firm in all capacities over his repeated failures to prevent market manipulation, FINRA said Tuesday.

As part of 10 separate settlements with FINRA, the exchanges and their affiliates, the last of which were finalized Tuesday, Samuel Lek consented to the entry of their findings and agreed to be barred, while the firm Lek Securities agreed to pay a $900,000 fine, accept certain foreign intraday trading restrictions and have an independent monitor, according to FINRA.

In settling the matter, however, Samuel Lek and Lek Securities neither admitted nor denied the charges, FINRA noted.

Lek Securities, Samuel Lek and his attorneys at the law firm Norton Rose Fulbright didn’t immediately respond to requests for comment.

Lek and the firm, among other things, were accused of violating FINRA and Exchange supervisory rules, and Rule 15c3-5 of the Securities Exchange Act of 1934 (the Market Access Rule).

Over the course of several years, Lek Securities provided market access to foreign traders who engaged in various forms of manipulative trading on U.S. equity and options exchanges that included layering, spoofing and cross-product manipulation, FINRA said. Samuel Lek and Lek Securities “substantially assisted this trading through a master-sub account held at Lek Securities and failed to reasonably supervise it,” according to FINRA.

Regardless of whether market manipulation activity is happening via a master-sub account or otherwise, broker-dealers are “required to establish and maintain reasonable supervisory procedures and market access controls to monitor for potentially manipulative trading activity by their customers,” FINRA said.

However, despite many “red flags” and ongoing investigations into the activity by FINRA, the exchanges and the Securities and Exchange Commission, Samuel Lek and Lek Securities allowed the manipulative trading to continue for several years, FINRA said. Samuel Lek and Lek Securities “even provided office space, computer servers, trading software, and other services to the master-sub account used by those customer-traders,” FINRA said.

FINRA and the Exchanges found that Samuel Lek and Lek Securities “failed to supervise the activities of the firm’s registered persons to achieve compliance with applicable securities laws and regulations, and failed to establish, maintain, and enforce written supervisory procedures to supervise the types of business in which the firm engaged,” according to FINRA.

Lek Securities also violated the Market Access Rule that requires broker-dealers that provide clients access to an exchange or alternative trading system to reasonably control the financial and regulatory risks of providing such access, according to FINRA.

“Disregarding repeated alerts and communications from regulators concerning potentially manipulative trading in the master-sub account, Samuel Lek and Lek Securities continued to allow their customers to engage in layering, spoofing, and cross-product manipulation,” FINRA said.

“This case demonstrates that broker-dealers cannot turn a blind eye to their obligations under FINRA and Exchange supervisory rules or under the SEC’s Market Access Rule,” FINRA and the exchanges said in a joint statement. “Enforcing these rules against broker-dealer gatekeepers preserves the integrity of our securities markets,” they stated.

In determining the appropriate monetary sanction, FINRA and the exchanges “took into account the sanctions imposed by the SEC in its parallel action against Samuel Lek and Lek Securities,” according to FINRA.

On March 10, 2017, the SEC sued Samuel Lek and Lek Securities, along with Nathan Fayyer and Sergey Pustelnik, executives of the foreign trading firm Avalon, in U.S. District Court for the Southern District of New York, claiming the defendants were guilty of their roles in “schemes to manipulate the securities markets.”

In that dispute, Lek Securities agreed to a three-year injunction requiring it to terminate business with foreign customers potentially engaged in market manipulation or manipulative trading and largely prohibiting it from providing intra-day trading to foreign customers, according to the SEC.

Lek Securities also agreed to retain an independent compliance monitor for a three-year period and, with Samuel Lek, agreed to permanent injunctions from violations of the charged antifraud and manipulative trading provisions, the SEC said. Lek Securities also agreed to pay a $1 million penalty plus $525,892 in disgorgement and prejudgment interest, and Samuel Lek agreed to pay a $420,000 penalty, according to the SEC.

In settling the SEC’s charges, Lek Securities and Samuel Lek also admitted that, as alleged in the SEC’s complaint, Avalon’s trading activity through Lek Securities constituted violations of the federal securities laws, the SEC said.

Jeff Berman

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