Broker Dealer Fined for Disclosing Non-Public Information to Buy-Side Investors

The SEC fined a broker-dealer and its former executive for disclosing confidential information in advance of block sales of securities.

In the Order, the SEC found that the broker dealer "disclosed to certain buy-side investors non-public, potentially market-moving information, concerning impending 'block trades' that the firm had been invited to bid on or was in the process of negotiating with the selling shareholders." The SEC said that the investors used the information to "pre-position" the stock that was the subject of the upcoming block trade despite the sellers' confidentiality requests.

The SEC concluded that the broker dealer disclosures were in violation of the firm's policies to protect material non-public information. The SEC found that the firm failed to enforce "information barriers" protecting material non-public information for the block trades from being shared by its equity syndicate private trading desk to a public-facing trading desk. The SEC stated that the firm was "unable to sufficiently scrutinize whether trades by that division, placed while the equity syndicate desk was in discussions with selling shareholders regarding potential block trades, were based on such confidential discussions." The SEC stated that even where the firm conducted an investigation based on an alert, it inaccurately concluded that the misuse of information was not possible. In a separate Order, the SEC found that the head of the syndicate desk "knew, or was reckless in not knowing, that such disclosures violated the terms of the auctions" and the broker dealer policies.

As a result, the SEC found that the broker-dealer violated Exchange Act Sections 10(b) ("Position limits and position accountability for security-based swaps and large trader reporting") and 15(g) ("Registration and regulation of brokers and dealers") and Rule 10b-5(b) ("Employment of manipulative and deceptive devices"). The SEC found that the former executive also violated Exchange Act Section 10(b) and Rule 10b-5.

To settle the charges, the broker-dealer agreed to (i) a censure, (ii) disgorgement of $138 million plus $28 million in prejudgment interest and (iii) an $83 million civil penalty. The former executive agreed to (i) a $250,000 civil penalty and (ii) various industry bars.

According to the press release, in a parallel action before the U.S. Attorney's Office for the Southern District of New York, the broker-dealer and its former executive were found criminally liable for the same actions and the firm paid $136,531,223 in restitution that will partially offset the SEC charges.

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