Greed Isn’t Good: Enforcement Roundup

The wheels of justice grind with proverbial sluggishness, but grind they do. Here is a compendium of recent busts, all of which constitute a cautionary tale for investors and traders.

Reckless trading was at the heart of a debacle that pared $53 million in assets down to $200,000 in one month, according to a Securities and Exchange Commission settlement with Thompson Consulting Inc. head Kyle J. Thompson. Thompson got the administrative shoe from the commission as part of a lengthy regulatory action involving Thompson’s trading of hedge funds Equity Options Fund and Premier Portfolio.

Thompson did not dispute the SEC’s claim that he enticed customers with a hedging strategy likely to insure the safety of principal, instead taking huge risks with an entirely different approach.

A related action before the Arizona Corporation Commission alleges that Thompson actually used client funds to write uncovered call options — a naked strategy that can lose much more than the income from writing the calls.

The swing from over $50 million in assets to chump change illustrates the basic reality of derivatives. No matter how much you make or how fast, you can always lose more faster.

Ever get the feeling the big guys just have a leg up on individuals and prop traders? Sometimes they do, and it’s not always legal. Lazard Capital Markets did not contest charges from the Financial Industry Regulatory Authority that it used an error account to give unrealistically good prices on New York Stock Exchange agency trades to its biggest institutional client.

The findings stated that the firm executed equity orders for the client, the vast majority of which were “not held” orders, and for a significant portion of these trades, the firm adjusted the price in favor of the client; that is, it provided the client with a price that was better than the firm’s actual average execution price on the NYSE floor.

Lazard agreed to a $550,000 fine and did not dispute allegations that some of its traders essentially robbed an error account to reward a huge player for order flow.

The same monthly FINRA disciplinary report points out the hazard of rogue brokers who trade without obtaining permission from clients, churning up commissions in the process. A Bakersfield, Calif., broker got the boot from FINRA for discretionary trading in accounts that allegedly never even had the requisite paperwork. Legit discretionary accounts require a lot of documentation, and some brokerage branch managers won’t allow discretionary trading at all.

FINRA describes the victims: “The findings stated that each of the customers was retired and elderly, and the accounts…  represented a substantial percentage of the customers’ life savings and net worth, and each customer relied upon the account for income.”

Ever wonder who trades obscure microcap securities which do not disclose much information about their business? Sometimes the sellers are illegally peeling off unregistered shares, which is sort of like printing money in your basement. The sales dilute the value of existing shares and are often part of pump-and-dump scams.

The SEC said some executives associated with K&L International Enterprises and Signature Leisure concocted a series of phony loans to microcap issuers that allowed the K&L crew to convert the debt to equity at a 50% discount and sell the stock illegally without registration.

The commission has leveled over $10 million in penalties on some of the alleged crooks, while proceedings are ongoing against others. The individuals illegally sold literally billions of shares and pocketed the proceeds, the SEC said.

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