5 Min Read
(Updates with comment from Wedbush, SEC enforcement director and more background)
By Sarah N. Lynch, Suzanne Barlyn and Emily Flitter
WASHINGTON, June 6 (Reuters) - U.S. securities regulators filed civil lawsuits on Friday against a private trading platform and a major brokerage firm, citing both cases as part of an agency crackdown on violations of core equity market structure rules.
In the first case, the Securities and Exchange Commission charged New York-based trading platform Liquidnet with improperly using its subscribers' confidential trading information to market its services. The company is paying a $2 million penalty to settle the charges without admitting or denying them. Liquidnet is a so-called "dark pool" operator. Dark pools are alternative trading systems that match buyers and sellers without publishing quotes. They compete with exchanges but are less transparent.
In the second case, the SEC charged Los Angeles-based brokerage firm Wedbush Securities Inc and a current and former employee with a slew of violations, stemming from allegedly giving anonymous foreign traders access to the U.S. equities markets without having proper risk controls in place.
"Both of these cases involve enforcement actions of rules designed to ensure that investors receive the protection that they expect and deserve in the context of the current equity market structure," SEC Enforcement Director Andrew Ceresney told reporters on Friday.
Wedbush and the two people charged are fighting the accusations in the SEC's administrative court. The employees are Jeffrey Bell, the firm's former vice president who oversaw the market access business, and Christina Fillhart, current senior vice president.
In a statement issued Friday, the firm said its risk controls and procedures were "reasonably designed to achieve compliance" and accused the SEC of taking action without "giving fair notice of its expectations" first.
The two cases came just one day after SEC Chair Mary Jo White unveiled a sweeping series of proposed equity market reforms targeting high-speed traders, less transparent trading venues, traditional stock exchanges and other brokerage firms.
Critics have raised concerns about high-speed trading, unlit markets like dark pools and the havoc that technological glitches at exchanges and major brokerages can wreak on the markets.
Friday marks the third time since 2011 the SEC has filed charges against a dark pool.
The SEC said that between 2009 and 2011, Liquidnet gave a business unit outside of its dark pool operation access to confidential user information and used it for marketing, as part of an effort to expand its business.
It also used confidential data in two sales tools in 2010 through 2012.
Seth Merrin, the chief executive officer at Liquidnet, said he agreed with the SEC that there was a "lack of oversight" in the firm's procedures but the firm has taken steps to fix that.
"We are very happy about resolving this case," he said, noting that customers were not harmed.
In the second case, the SEC laid out a laundry list of alleged violations against Wedbush, which also owns a stake in the BATS Global Markets exchange and is consistently ranked as one of the five largest firms by trading volume on the Nasdaq exchange.
The SEC said the company violated its market access rule between 2011 and 2013, when it allowed most of its customers to send orders directly onto trading venues over which the firm did not have "direct and exclusive control."
The SEC said that Bell and Fillhart both caused the violations.
An attorney for Bell said his client "vigorously denies the charges."
An outside attorney for Wedbush said Fillhart had no comment.
Wedbush is the second firm to face charges over market access rule violations.
The first was Knight Capital, now called KCG Holdings Inc , which in 2013 paid $12 million in connection with a computer glitch that flooded the market with erroneous orders and nearly bankrupted the firm.
The SEC's case against Wedbush also marks a regulatory intervention that industry observers had long expected against the firm, which has a decades-long history of repeated industry violations and a suspension of its founder.
While FINRA has filed numerous cases against Wedbush over 35 years, this marks the first SEC action against the firm.
The SEC's case also points to a history of red flags.
Several years ago, the SEC said, some of Wedbush's customers gave a Latvian trader access to the market, and he reaped illegal profits through manipulation.
SEC Enforcement Director Ceresney said the firm's disciplinary history will factor into the remedies the agency will seek in administrative court.
"It is a significant case," he said. (Reporting by Sarah N. Lynch in Washington and Emily Flitter and Suzanne Barlyn in New York; Additional reporting by Jonathan Stempel and John McCrank in New York; Editing by Doina Chiacu, Linda Stern and Lisa Shumaker)