SEC FILES SUIT AGAINST FAILING CLEARING FIRM THAT RAPIDLY FELL INTO FINANCIAL TROUBLES
The SEC obtained an asset freeze against a clearing firm that, according to the SEC, violated the customer protection rule and committed fraud by engaging in misleading transactions to conceal its failing financial position. The SEC also sued the firm’s founder, its president, and its FINOP for aiding and abetting the securities laws violations. The firm fell into financial problems when it ceased doing business with a large client and incurred a large loss in a penny stock transaction. The firm fell into a financial spiral because a loan it obtained to cover business expenses necessitated increased customer reserves. According to the SEC, the firm then used customer funds to pay business expenses and altered its accounting systems to reduce the customer reserve calculation. The SEC also proceeded against the firm’s president and its FINOP even though they did object to some of the fraudulent conduct but assisted the wrongful acts out of fear of being fired.
OUR TAKE: This action shows how financial problems can quickly take hold of a clearing firm. Once it had a couple of bad transactions and had to borrow money, the customer reserve requirements further strapped the firm. Rather than misuse customer funds, the firm should have ceased operations and/or consulted with FINRA as to how to proceed.