By Cyril Tuohy
For one of the largest trading firms on the Nasdaq Stock Market, the last two months have not been easy.
Earlier this week, financial industry regulators filed suit against Wedbush Securities for supervisory lapses and anti-money laundering violations in connection with providing access to markets to companies not authorized to participate in U.S. market transactions.
The complaint by the Financial Industry Regulatory Authority (FINRA) follows a similar complaint filed against the company by the Securities and Exchange Commission in early June alleging violations of the SEC’s market access rule.
Wedbush, in an email to InsuranceNewsNet, said risk management controls and supervisory procedures were “reasonably designed to achieve compliance with evolving regulatory requirements, and that they were consistent with the rules and guidance provided by FINRA.”
FINRA alleges that from January 2008 through August 2013 Wedbush dedicated insufficient resources to its risk management controls and supervisory systems and procedures.
The lack of oversight allowed some Wedbush Securities customers to “flood U.S. exchanges with thousands of potential manipulative wash trades and other potentially manipulative trades, including manipulative layering and spoofing,” FINRA said in a statement.
“Despite its obligations to monitor, review, and detect suspicious and potentially manipulative trades,” the FINRA statement continued, “Wedbush largely relied on its market access customers to self-monitor and self-report such trading without sufficient oversight and controls to detect ‘red flags.’”
FINRA also said Wedbush “created incentives that rewarded Wedbush compliance personnel with compensation based on market access customer trading volume.”
The FINRA action was filed a little more than two months after the SEC filed a similar complaint June 6, alleging Wedbush and two of its employees, Jeffrey Bell and Christina Fillhart, served as a securities trading gateway to U.S. markets for foreign, domestic, registered and unregistered companies.
SEC officials said that between July 2011 and January 2013 Wedbush gave traders access that “did not flow through any Wedbush systems before reaching exchanges and other trading venue in the U.S.,” and that the company’s risk practices were inadequate.
In a statement issued by Wedbush in June in response to the SEC’s complaint, the company said it “respectfully disagrees,” with the SEC’s position that the company’s controls and procedures were inadequate.
“The firm believes that its risk management controls and procedures in this area were reasonably designed to achieve compliance with applicable regulatory requirements, and that they were consistent with the rules and guidance given by the SEC and its staff beginning in 2011,” the company said.
Wedbush also said that it had discussed processes with the SEC before the market access rule was implemented.
“In several respects, however, the SEC now seeks to impose additional regulatory requirements retroactively, through enforcement proceedings, without giving fair notice of its expectations in advance,” Wedbush said.
The company also said it had closed the “accounts at issue” more than a year ago.
Wedbush Securities, a subsidiary of Wedbush, was founded in 1955. It registered with the SEC as a broker/dealer in 1966 and as an investment advisor in 1970. At the end of 2012 the company had 79 branch offices and 844 employees.
In a third, unrelated development involving a former adviser with Wedbush Morgan Securities, the predecessor of Wedbush Securities, a federal jury in Massachusetts has found Benjamin Lee Grant and his company, Sage Advisory Group, guilty of fraud.
SEC officials alleged that Grant, a former broker with Wedbush Morgan, lied to his brokerage customers to induce them to transfer assets in October 2005 to Sage Advisory Group, an investment advisor of which Grant was the sole owner.
Grant left Wedbush Morgan in September 2005 to run Sage Advisory.
Grant abrogated his fiduciary duty and misled customers as he knew that transferring customers to Sage would net him more in fees and commissions, the SEC said. The jury sided with the SEC after only two hours of deliberation in the trial that began Aug. 4.
Andrew Ceresney, director of the SEC Division of Enforcement, said the case reminds advisors that the well-being of a client still comes first.
“When brokers decide to convert their business to an investment advisory firm and want customers to follow them, they owe a duty of full and fair disclosure to those prospective advisory clients,” Ceresney said.
In its 59-year history, Wedbush Securities has “never previously been the subject of an SEC enforcement action, settled or otherwise,” the company said in the statement accompanying the SEC complaint of June 6.
“We are disappointed that the SEC has decided to bring charges against the firm and individuals in this instance, and look forward to a prompt and fair resolution of the matter,” Wedbush said in reference to the June 6 SEC action.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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