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Regulators Beat Around Wedbush

10/13/2014

Los Angeles Business Journal

Wedbush Securities Inc., capitalized in 1955 with $10,000 from its co-founders, has grown over the last 60 years to have more than $4 billion under management. Its 82-year-old namesake founder still shows up at the office before dawn, putting in a full day on the trading floor.

But the firm’s rise and the dogged work ethic of President Edward Wedbush has come at a cost.

The company was accused late last month by a Texas financial services company of organizing a massive, illegal stock market manipulation scheme. The charge is the latest in a drumbeat of allegations that have dogged the firm since its founding. Wedbush has been cited by regulators 74 times for regulatory transgressions ranging from submitting inaccurate or incomplete reports to noncompliance with rules and regulations. The majority – 50 of the 74 – occurred within the last decade.

The latest charge, by a company for which Wedbush is a market maker, comes as both federal and industry regulators have issued new claims that the firm’s risk controls are shoddy and allowed thousands of foreign traders to execute manipulative trades in the U.S. market.

Wedbush said his firm has adjusted its business practices and is in compliance with both Securities and Exchange Commission and Financial Industry Regulatory Authority rules. He attributes the increase in regulatory run-ins with his company’s growing prominence.

“As your business gets more successful, more powerful and more complex, you’ll see more attention,” Wedbush said. “Regulation has increased in size but that doesn’t mean they’re always right.”

Taking note

Right or not, the volume of complaints is what has caught the attention of regulators, clients and some former employees.

“Especially given the number of disciplinary actions against them by Finra, it is a firm that has had significant compliance problems,” said Emily Gordy, who until this month was the authority’s senior vice president of enforcement. “It’s not the norm. The vast majority of firms are trying to get it right on the compliance side.”

Indeed, the 74 regulatory actions the firm has faced over its history far exceed the number compiled by other local brokerage firms. Downtown L.A.’s Crowell Weedon & Co., which merged last year with Great Falls, Montana’s D.A. Davidson & Co., opened two decades before Wedbush. It has faced 18 complaints from federal, state or industry regulators in its history. That is the second-highest number among L.A. brokerages.

The problem, said Philip Aidikoff, a partner at Beverly Hills law firm Aidikoff Uhl & Bakhtiari, which has represented dozens of former Wedbush employees and clients in claims against the firm over the last decade, is one of culture

“You kind of scratch your head and wonder what’s going on over there,” he said. “Over the years, what we have found is a culture of lax supervision that has led to problems on the trading side and on the compliance side. I’ve never seen as many claims against a firm as I’ve seen against Wedbush. It’s just a different culture.”

Wedbush, in dismissing the regulatory and civil attention as part of the company’s “growing pains,” might have a point. Bigger brokerages do attract more scrutiny, and over the last 15 years or so, Wedbush has become one of the highest-volume traders on the Nasdaq stock exchange.

“That has gotten a lot of attention for us,” Wedbush said.

Had the company not grown so significantly, he said, Wedbush Securities would likely still be flying under the radar.

If Wedbush had done what he wanted in 1955, his firm would have been called Werner & Co., named after his former business partner and friend Robert Werner. The two invested $5,000 each to start up the brokerage but neither wanted to put their name on it, in fear of being associated with a company that could likely fail early.

“We sat at the kitchen table and flipped a coin,” Wedbush said. “I lost and we named the company Wedbush & Co.”

The investment firm generated $659 the first year and about $1,600 the second.

“Obviously, nobody got paid,” he recalled.

Werner left the business shortly thereafter.

Today, Wedbush Inc., the parent company of Wedbush Securities, manages more than $4 billion in assets and employs 1,000 people in more than 100 offices throughout the United States.

The firm’s growth came in large part as a result of its namesake’s work ethic. The octogenarian said he still works half a day.

“A half a day is from 5 a.m. to 5 p.m.,” he joked.

He arrives at the office at 5 a.m. most days, assuming his seat at his desk on the trading floor inside the firm’s downtown high-rise.

And despite his firm’s growing pile of legal battles with regulators and clients, Wedbush insists he’s still the guy to run the firm.

“The word retirement … I don’t even know how to spell it,” Wedbush said, adding he has the passion – and health – to get the job done.

Ongoing problems

Like Wedbush the man, the legal problems dogging the firm don’t show signs of slowing down

The first big fight this year came in June, when the SEC accused Wedbush Securities of violating market-access rules that require firms to scrutinize foreign investors who trade on the U.S. markets via brokers. That is designed to prevent foreign traders from laundering money or otherwise committing financial mischief.

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

In an interview with the Business Journal last week, Wedbush said the firm’s actions caused no harm to any investors and that the firm agreed to pay $2 million and adjust its market access practices to settle the dispute.

The most recent SEC document regarding the dispute confirmed it had “reached an agreement in principle to a settlement,” but it did not disclose the terms.

Meanwhile, Finra, an industry-run regulatory agency, filed its own complaint against Wedbush Securities in August, citing similar violations. The agency also accused the firm of providing ample opportunities for foreign investors to launder money by failing to ensure appropriate risk management.

Gordy, Finra’s former head of enforcement, is now in private practice at a Maryland law firm. She said that because Wedbush Securities has become known as a firm that has had significant compliance problems it could be up against a more severe punishment from Finra than it has seen in the past.

“In certain circumstances it may be appropriate to significantly raise sanctions in an area where the current sanction levels have become the ‘cost of doing business,’” she said.

The Finra case is still pending.

Wedbush has also run afoul of clients. The most recent allegations led Life Partners Holding Inc., a Waco, Texas, company, to sue Wedbush in Los Angeles Superior Court last month. Wedbush was a market maker in Life Partners’ stock, and the company claims the brokerage engaged in a “naked short sale” scheme.

Short sales are a bet that the price of a stock will go down; an investor agrees to sell “borrowed” stock at a certain price, buying the stock when the price falls and repaying the lender with those lower-price shares, profiting from the difference. The shares are generally borrowed from brokerage houses, either from their own inventory or from a client’s margin account. The SEC has established a three-day window for the borrowing to take place, and in a naked short sale, the seller-borrower does not take possession or arrange to take possession of the shares in that time. In other words, the short seller has sold stock it hasn’t borrowed. When that happens, the seller cannot deliver the shares as promised and the transaction is considered a “fail.”

“Naked short selling destabilizes and depresses a company’s share price because it removes any supply constraint on stock sales,” the Life Partner’s complaint said. “An unlimited supply of any commodity, including a company’s stock, places a downward pressure on the price of that commodity.”

Wedbush Securities has not yet filed a response to Life Partners, but Ed Wedbush is generally dismissive of the legal challenges the firm faces, repeating his assertion that his company’s stature is drawing complaints.

“Our firm has gotten a lot more complex and, as we should, we’ve attracted a lot more attention,” he said.


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