SEC CHARGES WEB-BUSH SECURITIES INC., WITH VIOLATING AGENCY'S MARKET ACCESS RULE

FROM:  U.S. SECURITIES EXCHANGE COMMISSION 

The Securities and Exchange Commission announced charges against a Los Angeles-based market access provider and two officials accused of violating the agency’s market access rule that requires firms to have adequate risk controls in place before providing customers with access to the market.

The SEC’s Enforcement Division alleges that Wedbush Securities Inc., which has consistently ranked as one of the five largest firms by trading volume on NASDAQ, failed to maintain direct and exclusive control over settings in trading platforms used by its customers to send orders to the markets.  Wedbush did not have the required pre-trade controls, failed to restrict trading access to people whom the firm preapproved and authorized, and did not conduct an adequate annual review of its market access risk management controls.  The Enforcement Division alleges that the firm’s violations of the market access rule were caused by Jeffrey Bell, the former executive vice president in charge of Wedbush’s market access business, and Christina Fillhart, a senior vice president in the market access division.

“Wedbush provided market access to overseas traders without preapproval and without ensuring that they complied with U.S. law,” said Andrew J. Ceresney, director of the SEC Enforcement Division.  “We will hold Wedbush accountable for reaping substantial profits while failing to protect U.S. markets from the risks posed by these traders.”

Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit, added, “The market access rule was adopted out of concerns that some broker-dealers did not have effective controls in place for their market access.  This enforcement action against Wedbush is a cornerstone of our ongoing efforts to hold accountable any broker-dealers who fail to effectively implement market access controls and procedures.”

According to the SEC’s order instituting administrative proceedings, the violations began in July 2011 and continued into 2013.  Wedbush allowed the majority of its market access customers to send orders directly to U.S. trading venues by using trading platforms over which Wedbush did not have direct and exclusive control.  Bell was aware of the requirements of the market access rule and should have known that the firm’s risk management controls and supervisory procedures related to market access did not comply with the market access rule.  Fillhart also had responsibility for overseeing Wedbush’s market access business and received inquiries by exchanges about potential violations by Wedbush and its customers.  Despite these red flags, Fillhart did not take adequate steps to prompt the firm to adopt reasonably designed risk management controls.

According to the SEC’s order, in addition to violating the market access rule (Securities Exchange Act Rule 15c3-5), Wedbush violated other regulatory requirements as a result of trading by its market access customers.  These violations include Rule 203(b)(1) of Regulation SHO relating to short sales, Rule 611(c) of Regulation NMS related to intermarket sweep orders, Rule 17a-8 concerning anti-money laundering requirements, and Rule 17a-4(b)(4) concerning the preservation of records.

The proceeding before an administrative law judge will determine whether Wedbush willfully violated these provisions of the federal securities laws, and whether Bell and Fillhart were causes of the firm’s violations of the market access rule.  The judge also will decide what sanctions, if any, are appropriate.

The SEC’s investigation was conducted by Steven Buchholz of the Market Abuse Unit and San Francisco Regional Office as well as Jina Choi, who formerly worked in the Market Abuse Unit and is now director of the San Francisco office.  The case was supervised by Mr. Hawke and Robert Cohen, co-deputy chief of the Market Abuse Unit.  The Enforcement Division’s litigation will be led by Lloyd Farnham and John Yun of the San Francisco office.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

SEC ALLEGES FOUR FIVE LLC COMMITTED SECURITIES FRAUD

When a company selling investments touts “risk-free” and “triple digit returns” then most likely the investments are not legitimate. Most fraudsters tout that their way of making fantastic returns is unique and unknown to most people and that is why the returns are so compelling for potential investors. Of course it does not make since that only people working at a certain company know of some secret way to trade markets that always leads to a huge rate of return. Common since dictates that most money managers that have been in the business 20 or 30 years have seen every system legitimate and illegitimate for making money. As such, over long periods of time nothing that generates profits escapes their notice. After all, that is what they have been doing for a living over a 20-30 year period. The following excerpt is from the SEC web site and involves a company called Four Five, LLC:

“The United States Securities and Exchange Commission (“Commission”) announced the filing of a civil injunctive action in Atlanta, Georgia on June 2, 2011, alleging that Michael L. Rothenberg (“Rothenberg”) and the company he controlled, Four Five, LLC (“Four Five”) operated a fraudulent “Prime Bank” scheme that violated the antifraud provisions of the federal securities laws.

The Commission’s complaint alleges that between at least February 2010 and March 2010, Rothenberg, through Four Five, used misrepresentations and omissions of material fact to induce investors to participate in a secret and allegedly risk-free trading platform or trading facility. This trading platform or trading facility purportedly involved transactions among international banks that would generate substantial return on a recurring basis. Specifically, Rothenberg represented that the trading platform would produce returns in excess of 300% every fourteen days. Rothenberg and Four Five also represented to investors, both orally and in writing, that the majority of their funds would remain at all times in Rothenberg’s attorney trust account, and that all funds invested, along with the profits, would be returned to the investors at the conclusion of the trades. Rothenberg further represented to the investors that the investment was risk-free because their funds would remain in his attorney trust account. Contrary to Defendants’ representations, a risk-free trading process providing the returns promised by Defendants does not exist. Moreover, contrary to Rothenberg’s representations that investor funds would remain in his attorney trust account, Rothenberg began disbursing investor funds within days of receipt of those funds. Between March 2010 and October 2010, at least $210,000 in investor funds were transferred to a bank account designated for contributions to Rothenberg’s judicial election campaign. Rothenberg used another $190,000 of investor funds for personal expenses. Although Rothenberg ultimately returned approximately $910,000 to investors, Defendants have misappropriated at least $800,000 of investor funds.
In its Complaint, the Commission alleges that Rothenberg and Four Five Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.”