NEW YORK May 19 The U.S. Securities and Exchange Commission charged four former officials at a Penson Worldwide Inc unit with violations of a post-financial crisis rule on securities lending that was designed to help markets function by ensuring that trades are completed.
Rule 204 of Regulation SHO was adopted by the SEC in July 2009 to curb abuses in "naked" short sales, where investors sell shares short without first borrowing those shares or making sure they can be borrowed. An inability to deliver such shares in a timely manner is called a "fail."
According to the SEC, Thomas Delaney, once chief compliance officer at Penson Financial Services, knew the now-bankrupt clearing services firm's procedures for selling customer margin securities were causing rule violations, yet affirmatively assisted the violations and concealed them from regulators.
The SEC also said Charles Yancey, once the unit's chief executive, ignored "significant red flags" about Delaney's involvement in the violations, including the alleged concealment. Two other former Penson officials settled related charges, the SEC said.
According to the SEC, when Penson loaned stocks in customer margin accounts to third parties, and the customers then sold the stocks, the firm waited too long to recall the loans. It said this led to "serial failures to deliver," sometimes lasting several days.
"This enforcement action seeks to hold Penson executives responsible for choosing profits over compliance with Regulation SHO," SEC enforcement chief Andrew Ceresney said in a statement.
The SEC said it plans to litigate against Yancey and Delaney in administrative proceedings and settled with former Penson securities lending officials Michael Johnson and Lindsey Wetzig.
Without admitting or denying the findings, Johnson agreed to pay a $125,000 penalty and accept a five-year securities industry ban, while Wetzig agreed to a censure, the SEC said.
Kit Addleman, a lawyer for Yancey, said: "The SEC is attempting to hold the CEO of what was once the second-largest clearing firm in the country responsible for technical violations that he wasn't involved in. The SEC's claims are baseless, and we look forward to disproving them."
Brent Baker, a lawyer for Delaney, said his client is "confident that he will prevail."
Lawyers for Johnson and Wetzig did not immediately respond to requests for comment.
Before the case was announced, SEC Commissioner Kara Stein on Monday said gatekeepers like chief compliance officers should be held more accountable for oversight, and that the regulator could "provide guidance that sets clearer expectations on what it means to act appropriately." She spoke at a Compliance Week conference in Washington, D.C.
Penson Worldwide filed for Chapter 11 protection in January 2013 with the Delaware bankruptcy court. The court approved Penson's liquidation in July. (Reporting by Jonathan Stempel in New York; Additional reporting by Sarah N. Lynch in Washington, D.C.; Editing by Cynthia Osterman)