SEC settles first-of-its-kind shorting suit
06 January 2017 Washington DC
Image: Shutterstock
The US Securities and Exchange Commission (SEC) has settled a first-of-its-kind cease-and-desist proceedings against the senior management of Wilson-Davis & Co, a Utah-based broker-dealer, for short selling violations.
The violation related to Regulation SHO, which requires that, before a broker-dealer effects a short sale, the broker-dealer must locate a source of borrowable securities that can be delivered on time.
The rule includes a limited exception for short sales executed in connection with bona fide market making, which Wilson-Davis leveraged between November 2011 and May 2013 despite it being inapplicable because much of the broker-dealer’s proprietary trading activity was not legitimate.
According to the SEC, Wilson-Davis engaged in numerous short sales in over-the counter equity securities and willfully violated Rule 203(b)(1) of Regulation SHO and resulted in “improper trading profits”.
This is the first time that the SEC has charged the CEO of a broker-dealer with violating the CEO certification requirement of the market access rule.
The SEC handed Wilson-Davis CEO, Paul Davis, a $25,000 penalty for violating the certification requirement of the market access rule because “the certification was inadequate and he signed without being familiar with the rule, not knowing who at the firm was responsible for compliance with it nor making reasonable inquiries about the firm’s annual review and the results of any such review”.
Davis consented to the order without admitting or denying the findings and agreed to cease and desist from such violations.
The SEC also charged the broker’s vice president and head trader, Byron Barkley and Anthony Kerrigone, with similar violations.
Barkley was ordered to pay a disgorgement of $67,710.20, prejudgment interest of $8,977.83, and a penalty of $50,000, which he also accepted without admitting or denying the findings.
Kerrigone will pay a disgorgement of $486,840, prejudgment interest of $63,160.50, and a penalty of $50,000 under the same terms.
“We allege that Wilson-Davis violated SEC rules that help ensure fair markets, including the rules for short sales and for market access,” said Andrew Ceresney, director of the SEC’s enforcement division.
“Public confidence in our markets depends on careful compliance with these market structure rules.”
The violation related to Regulation SHO, which requires that, before a broker-dealer effects a short sale, the broker-dealer must locate a source of borrowable securities that can be delivered on time.
The rule includes a limited exception for short sales executed in connection with bona fide market making, which Wilson-Davis leveraged between November 2011 and May 2013 despite it being inapplicable because much of the broker-dealer’s proprietary trading activity was not legitimate.
According to the SEC, Wilson-Davis engaged in numerous short sales in over-the counter equity securities and willfully violated Rule 203(b)(1) of Regulation SHO and resulted in “improper trading profits”.
This is the first time that the SEC has charged the CEO of a broker-dealer with violating the CEO certification requirement of the market access rule.
The SEC handed Wilson-Davis CEO, Paul Davis, a $25,000 penalty for violating the certification requirement of the market access rule because “the certification was inadequate and he signed without being familiar with the rule, not knowing who at the firm was responsible for compliance with it nor making reasonable inquiries about the firm’s annual review and the results of any such review”.
Davis consented to the order without admitting or denying the findings and agreed to cease and desist from such violations.
The SEC also charged the broker’s vice president and head trader, Byron Barkley and Anthony Kerrigone, with similar violations.
Barkley was ordered to pay a disgorgement of $67,710.20, prejudgment interest of $8,977.83, and a penalty of $50,000, which he also accepted without admitting or denying the findings.
Kerrigone will pay a disgorgement of $486,840, prejudgment interest of $63,160.50, and a penalty of $50,000 under the same terms.
“We allege that Wilson-Davis violated SEC rules that help ensure fair markets, including the rules for short sales and for market access,” said Andrew Ceresney, director of the SEC’s enforcement division.
“Public confidence in our markets depends on careful compliance with these market structure rules.”
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