Penson executives 'misled' regulators, says SEC
20 May 2014 Washington DC
Image: Shutterstock
Four former officials of the now-bankrupt clearing firm Penson Financial Services intentionally and systematically violated a naked short selling rule with their securities lending dealings, according to the US Securities and Exchange Commission (SEC).
The SEC brought the charges against Penson’s Thomas Delaney II and Charles Yancey on 19 May, accusing the pair of violating Rule 204 of Regulation SHO, which was implemented in 2009 to prevent abuses in naked short sales.
Two former Penson securities lending officials—Michael Johnson and Lindsey Wetzig—were charged in administrative proceedings and have agreed to settle the charges. The SEC intends litigate the charges against Delaney and Yancey in a separate proceeding.
Rule 204, adopted in response to the financial crisis, addresses the negative effects that fails to deliver have on markets. Penson violated the rule when it loaned securities held in customer margin accounts to third parties and the margin customers sold those securities, but waited until the settlement date (T+3) to recall the stock loans.
“This practice resulted in serial failures to deliver at the firm level. Rule 204 required Penson to purchase or borrow sufficient shares to close out those failures to deliver no later than the beginning of regular market hours on the sixth business day after the sale (T+6),” according to the SEC.
Johnson and Wetzig allowed the firm-level failures to deliver to persist until the borrowers returned the recalled shares, which often did not happen until the close of business on T+6.
Penson chief compliance officer Delaney had direct knowledge that the firm’s procedures for sales of customer margin securities were violating naked short selling rules, and actively assisted violations because he did not want to incur compliance costs, alleged the SEC.
President and CEO Charles Yancey, meanwhile, ignored significant red flags about Delaney’s involvement in the violations and the fact that he was concealing them from regulators, according to the SEC.
“This enforcement action seeks to hold Penson executives responsible for choosing profits over compliance with Regulation SHO,” commented Andrew Ceresney, director of the SEC’s enforcement division. “We will aggressively pursue those who disregard this important rule, especially when they take affirmative steps to mislead regulators.”
Daniel Hawke, chief of the SEC enforcement division’s market abuse unit, added: “Compliance officers are a critical line of defense against violations of the securities laws, and we rely on them to help prevent infractions from happening in the first place.”
“Delaney, however, crossed the line when he participated in the firm’s Regulation SHO violations and affirmatively acted to perpetuate or conceal them.”
Johnson has agreed to pay a $125,000 penalty and is barred from the securities industry for at least five years, while Wetzig will be censured. In settling, the pair neither admitted nor denied the SEC’s findings.
Lawyers for Yancey and Delaney have vowed to fight the charges.
The SEC brought the charges against Penson’s Thomas Delaney II and Charles Yancey on 19 May, accusing the pair of violating Rule 204 of Regulation SHO, which was implemented in 2009 to prevent abuses in naked short sales.
Two former Penson securities lending officials—Michael Johnson and Lindsey Wetzig—were charged in administrative proceedings and have agreed to settle the charges. The SEC intends litigate the charges against Delaney and Yancey in a separate proceeding.
Rule 204, adopted in response to the financial crisis, addresses the negative effects that fails to deliver have on markets. Penson violated the rule when it loaned securities held in customer margin accounts to third parties and the margin customers sold those securities, but waited until the settlement date (T+3) to recall the stock loans.
“This practice resulted in serial failures to deliver at the firm level. Rule 204 required Penson to purchase or borrow sufficient shares to close out those failures to deliver no later than the beginning of regular market hours on the sixth business day after the sale (T+6),” according to the SEC.
Johnson and Wetzig allowed the firm-level failures to deliver to persist until the borrowers returned the recalled shares, which often did not happen until the close of business on T+6.
Penson chief compliance officer Delaney had direct knowledge that the firm’s procedures for sales of customer margin securities were violating naked short selling rules, and actively assisted violations because he did not want to incur compliance costs, alleged the SEC.
President and CEO Charles Yancey, meanwhile, ignored significant red flags about Delaney’s involvement in the violations and the fact that he was concealing them from regulators, according to the SEC.
“This enforcement action seeks to hold Penson executives responsible for choosing profits over compliance with Regulation SHO,” commented Andrew Ceresney, director of the SEC’s enforcement division. “We will aggressively pursue those who disregard this important rule, especially when they take affirmative steps to mislead regulators.”
Daniel Hawke, chief of the SEC enforcement division’s market abuse unit, added: “Compliance officers are a critical line of defense against violations of the securities laws, and we rely on them to help prevent infractions from happening in the first place.”
“Delaney, however, crossed the line when he participated in the firm’s Regulation SHO violations and affirmatively acted to perpetuate or conceal them.”
Johnson has agreed to pay a $125,000 penalty and is barred from the securities industry for at least five years, while Wetzig will be censured. In settling, the pair neither admitted nor denied the SEC’s findings.
Lawyers for Yancey and Delaney have vowed to fight the charges.
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