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Archive for March, 2018


Timary Delorme and Wedbush Securities, Inc.

The Securities and Exchange Commission announced charges against Wedbush Securities Inc. for failing to supervise employee Timary Delorme after the broker-dealer ignored numerous red flags indicating that Delorme was involved in a long-running pump-and-dump scheme targeting retail investors.  Delorme agreed to settle fraud charges stemming from the same scheme.  This is the second SEC action against Wedbush this year and the third since 2014.

The SEC’s investigation found that Delorme – a registered representative of Wedbush – received undisclosed benefits for investing her customers in microcap stocks that were the subject of a “pump-and-dump” scheme orchestrated by Izak Zirk Engelbrecht, who was previously charged by the Commission and criminal authorities in separate actions.  According to the SEC’s order, Wedbush ignored multiple signs of Delorme’s fraud, including a customer email outlining Delorme’s involvement in the scheme and multiple FINRA arbitrations and inquiries regarding her penny stock trading activity.  In response to these clear red flags, Wedbush conducted two flawed and insufficient investigations into Delorme’s conduct but failed to take appropriate action.

The SEC’s order instituting administrative proceedings against Wedbush charges that the broker-dealer failed reasonably to supervise Delorme with a view to preventing and detecting her violations.  The matter will be scheduled for a hearing before an administrative law judge, who will hear the case and prepare an initial decision.  A separate order finds that Delorme violated the antifraud provisions of the federal securities laws.  Without admitting or denying the findings, Delorme agreed to entry of the order, which requires her to pay a $50,000 penalty, imposes industry and penny stock bars, and orders her to cease and desist from future violations.

The SEC previously charged Engelbrecht, 15 other individuals, and several entities in the related manipulation scheme:

Eleven individuals, including Engelbrecht, pleaded or were found guilty in parallel criminal proceedings.

Broker Charged With Repeatedly Putting Customer Assets At Risk

The Securities and Exchange Commission today announced that Electronic Transaction Clearing (ETC), a registered broker-dealer headquartered in Los Angeles, has agreed to settle charges that it illegally placed more than $25 million of customers’ securities at risk in order to fund its own operations.

Among other things, the SEC found that ETC violated the Customer Protection Rule, which is intended to safeguard customers’ cash and securities so that they can be promptly returned if a broker-dealer fails.  It requires broker-dealers to maintain physical possession or control of customers’ fully paid and excess margin securities.

According to the SEC’s order, ETC put customer securities at risk numerous times in 2015.  ETC improperly transferred almost $8 million of fully paid securities belonging to cash customers to an account at another clearing firm to meet margin requirements on borrowed funds, and the firm used more than $17 million of securities of two customers to borrow funds without consent.  The order also finds that ETC improperly commingled customers’ securities and allowed a customer’s excess margin securities to be loaned out by the other clearing firm.

“The SEC has brought several recent cases charging violations of the Customer Protection Rule, which establishes critical protections to ensure that investors’ securities are kept safe by broker-dealers,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office.  “As this case shows, no broker-dealer is allowed to use its customers’ securities to fund its own operations.”

The SEC’s order charged ETC with violating the Securities Exchange Act and Customer Protection Rule as well as other related rules.  Without admitting or denying the SEC’s findings, ETC agreed to entry of the order, to pay an $80,000 penalty, to cease and desist from committing or causing any similar violations in the future, and to be censured.  ETC cooperated with the SEC’s investigation and has taken remedial steps to prevent future violations.

Robert Mark Magee Settles Charges for Cheating Clients in Fraudulent Cherry-Picking Scheme

The Securities and Exchange Commission today announced settled charges against an Austin, Texas-based investment adviser for defrauding his clients through a “cherry-picking” scheme.  The adviser, Robert Mark Magee, who is the principal, sole owner, and sole employee of Valor Capital Asset Management LLC, has agreed to be banned from the securities industry and pay more than $715,000 to resolve the charges.

According to the SEC’s order, for almost three years, Magee traded securities in Valor’s omnibus account but waited to allocate the trades to client accounts until after the securities’ performance changed over the course of the day.  Magee then “cherry-picked” the trades, disproportionately allocating profitable trades to his accounts and unprofitable trades to his clients’ accounts, reaping substantial profits for himself at his clients’ expense. The SEC’s order found that for most of the three-year period there was less than a one-in-a-trillion chance that the outsized performance of Magee’s personal account, compared to that of his clients’ accounts, was due to chance.

“This case echoes the several actions our office has brought in recent months aimed at protecting unsuspecting retail investors from investment advisers who allegedly cheat their clients by cherry-picking profitable trades,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.  “The settled order here finds that Magee and Valor cherry-picked trades to their clients’ detriment for almost three years.”

The SEC’s order found that Magee and Valor each violated antifraud provisions of the federal securities laws.  Without admitting or denying the SEC’s findings, Magee and Valor agreed to the entry of a cease-and-desist order and to pay disgorgement, prejudgment interest, and civil penalties totaling $715,871.57. Magee also agreed to be barred from the securities industry.

Wedbush Securities Inc. fined $1.5 Million by FINRA

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Wedbush Securities Inc. $1.5 million for violating the Securities and Exchange Commission’s (SEC) Customer Protection and Net Capital Rules, and for related supervisory and books and records failures.

The SEC Customer Protection Rule creates requirements to protect customers’ funds and securities. To ensure that customers could recover their assets in the event of the broker-dealer’s insolvency, the rule requires the broker-dealer, which maintains custody of customer securities, to obtain and maintain physical possession or control over certain of those securities. These securities must be segregated in a “control location,” free of liens or any other encumbrance that could prevent customers from taking their possession. The rule also requires the broker-dealer to maintain a reserve of cash or qualified securities, in a bank account, that is at least equal in value to the net cash the broker-dealer owes its customers.

The SEC Net Capital Rule regulates the ability of broker-dealers to meet their financial obligations to customers by requiring broker-dealers to maintain a minimum amount of net capital and to compute their net capital in accordance with specified formulas.

FINRA found that, during a five-month period in 2015 and 2016, Wedbush was net capital deficient, ranging between $10.5 million and $59.4 million. The deficiencies resulted from Wedbush’s failure to take required deductions when valuing certain certificates of deposit for purposes of computing its net capital.

In addition, from 2011 to 2016, Wedbush failed to accurately calculate its customer reserve requirement on 84 occasions, causing the firm to underfund its customer reserve account 73 times, in amounts ranging from approximately $2 million to $77 million. Wedbush also included ineligible assets in its customer reserve account, causing it to underfund its reserve an additional 110 times, in amounts ranging from approximately $9 million to $375 million.

Also, from 2009 to 2016, Wedbush repeatedly violated the possession or control requirement of the Customer Protection Rule by creating and/or increasing deficits in the quantity of securities it was required to keep in its possession or control, and holding customer assets in locations that were not protected from claims by third parties.

“Firms have a fundamental responsibility to safeguard the securities of their customers,” said Susan Schroeder, FINRA’s Executive Vice President, Department of Enforcement. “The Customer Protection and Net Capital Rules are important components of investor protection, and member firms must have reasonably designed and maintained systems and supervision to ensure both that they comply with the rules’ requirements, and detect and remediate any weaknesses.”

Wedbush also failed to establish and maintain supervisory systems and procedures reasonably designed to ensure compliance with the Customer Protection and Net Capital Rules, which exposed customer funds and securities to risk and prevented the firm from detecting the deficiencies for nearly seven years. Their supervisory failures also caused the firm to maintain inaccurate books and records, and to file 37 inaccurate FOCUS reports.

In settling this matter, Wedbush neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

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