SEC Charges Executives at Clearing Firm with Making Improper Margin Loans

The SEC charged four former clearing firm officials for their roles in a series of accounting and disclosure failures stemming from decisions to extend credit to certain customers beyond what is allowed under the margin requirements.

The SEC alleged that the clearing broker-dealer provided customers with nearly $100 million in margin loans secured by mostly "risky, unrated municipal bonds," such as those that were used to fund a horse racetrack operated by one of the customers. The SEC investigation found that instead of liquidating the collateral, accounting for the loan losses properly and disclosing the situation to the firm's investors, the firm violated federal margin regulation by extending more loans to the offending customers "in the hope that their financial condition would consequently improve and they could pay back the loans." The SEC elaborated that the firm was "counting on Texas changing its gambling laws to allow slot machines at horse racetracks" to satisfy the customers' margin calls. The firm's eventual accounting and disclosures of the loan losses reached $60 million and resulted in its 2013 bankruptcy.

The SEC filed an additional complaint against one of the firm's customers, who was chair of the board for the company that operated the horse racetrack, that alleged he had "lied about the status of his collateral while fraudulently obtaining $6.8 million in loans or credit from the firm."