Firm Settles FINRA Charges for Manipulative Trading and Misleading Emails

A broker-dealer settled FINRA charges for failing to detect potentially manipulative trading by its customers and proprietary traders and for allowing a representative to send misleading emails to retail customers.

According to the AWC, the firm relied on a third-party automated surveillance system to monitor for potentially manipulative trading, such as spoofing and layering, but set the alert parameters too narrowly. FINRA found the firm excluded potential spoofing and layering orders entered more than one minute before the executed order and only captured orders entered at or outside the National Best Bid and Offer. Additionally, FINRA found the firm delegated alert reviews to compliance associates who rarely documented escalations, and the company lacked written procedures detailing how to evaluate these alerts or supervise the associates' decisions to close them.

In addition, FINRA found that the firm failed to reasonably supervise a registered representative who sent over a thousand emails to retail customers containing misleading, unwarranted, exaggerated, or promissory statements about private placements. FINRA said the firm's email review system flagged 130 of these communications, which included false claims that the representative was an investment banker and lacked factual bases or risk explanations for the investments. Despite these red flags, the company's supervisory personnel marked all 130 flagged emails as compliant without further review or escalation.

FINRA determined that the firm violated FINRA Rule 3110 ("Supervision") by (i) failing to establish, maintain, and enforce a supervisory system and written supervisory procedures reasonably designed to achieve compliance with rules prohibiting manipulative trading; (ii) failing to reasonably supervise the representative's email communications; and (iii) failing to enforce its procedures to escalate communications that violated FINRA Rule 2210 ("Communications with the Public").

To settle the case, the firm agreed to a censure and a $250,000 fine, of which $150,000 would be paid to FINRA and the remainder to Investors Exchange LLC. Additionally, the company agreed to an undertaking requiring a senior management member to certify in writing within 90 days that the firm had remediated the identified issues and implemented a compliant supervisory system.