BD To Pay $8 Million For Failing To Stop Illegal Selling Despite Red Flags
A broker-dealer has agreed to pay over $8 Million for failing to properly supervise a trader that engaged in illegal short selling. The SEC alleged that the firm allowed the short selling even though the trader’s supervisor, the firm’s trading Control Room and its Legal and Compliance Department all had indications of his unlawful activities. The Control Room flagged the trader’s transactions but never adequately investigated the trading. The trader had asked the Legal and Compliance Department whether his actions were lawful; rather than prohibit the trading, the trader was directed to outside counsel. The trader solicited advice from 3 different law firms, none of whom indicated that his selling complied with the securities laws. Nevertheless, the trader represented that outside counsel indicated that his trading was lawful.
OUR TAKE: We often see this type of situation in large firms where a villain uses the bureaucracy to hide his actions. Everybody in the firm thought somebody else would stop the trading. The supervisor relied on the Control Room. The Control Room relied on the Legal and Compliance Department, who relied on outside counsel. Meanwhile, nobody stopped the illegal activity.