SEC FILES SETTLED PROCEEDING AGAINST INTER-DEALER BROKER
The SEC filed a settled administrative proceeding against ICAP Securities USA LLC, the U.S. subsidiary of the world’s largest inter-dealer broker, ICAP plc. The action, based on alleged violations of Securities Act Sections 17(a)(2)&(3) and Exchange Act Section 15C, and the pertinent rules, also names seven employees of the firm as Respondents. In the Matter of ICAP Securities USA LLC, Adm. Proc. File No. 3-13726 (Dec. 18, 2009).
The Order alleges three key violations: 1) fictitious flash trades; 2) misrepresentations regarding certain workup protocols; and 3) misrepresentations regarding whether the firm conducts proprietary trades. The Order also alleges books and records violations in connection with these violations as well as a failure to supervise.
In general, inter-dealer brokers match buyers and sellers in the OTC markets for treasury and mortgage backed securities, derivatives and others. Traditionally, trades were “voice” or on the phone, but now are also electronic. The brokers are paid commissions for trades that are completed by their customers who are other brokers and large financial institutions. Buyers and sellers are matched. Since customers can view the trading screens, dealers with greater activity on their screens are well positioned to attract more business.
First, on its U.S. Treasury desk, the Commission alleges that ICAP engaged in deceptive conduct by displaying fictitious “flash” trades. That information was available for customer consideration in making trading decisions. Over a one year period beginning in December of 2004, thousands of fictitious trades appeared on the screens.
Second, the firm also deceived customers by representing that the trading screens would handle customer orders in accord with certain specified workup protocols. In fact, those protocols were not followed. Individual brokers overrode the system by using manually prepared tickets to liquidate house positions that were acquired through error trades or through ICAP’s posting of executable bids and offers. As with the flash trades, between December 2004 and December 2005, manual tickets were used in thousands of instances in this fashion. This resulted in customer trades being treated in a different manner than would have been expected in many instances.
Third, filings represented that the firm did not engage in proprietary trading on its mortgage backed securities desk. Contrary to this representation, in fact, at least two former brokers and the manager and assistant manger of the desk engaged in profit-seeking trading for their ICAP house accounts from 2005 through 2008. This type of trading was contrary to ICAP policy.
The individual broker Respondents, Peter Agola, Ronald Boccio, Kevin Cunningham, Donald Hoffman and Anthony Parisi are alleged to have participated in this conduct. Respondents Ronald Purpora and Gregory Murphy failed to property supervise the brokers on the U.S. Treasuries desk, according to the Order.
To resolve the action, the firm agreed to a number of undertakings. Those include the retention of an independent consultant who cannot be terminated without the approval of the staff. The consultant, who will not have an attorney client relation with the firm, will conduct a review of the current controls, trading activities and books and records. Based on that review, the consultant will recommend any additional policies and procedures for the firm. Follow-up reviews will also be conducted.
In addition, the firm also agreed to the entry of a cease and desist order and to pay disgorgement of $1 million. ICAP also agreed to pay a civil penalty of $24 million.
Each of the individual Respondents agreed to the entry of a cease and desist order and to a suspension from association with any broker or dealer for period of three months. In addition, each agreed to pay a $100,000 penalty except Mr. Hoffman who retired nearly four years ago who will pay a $50,000 penalty.