(Updates with comment from Wedbush, SEC enforcement director
and more background)
By Sarah N. Lynch, Suzanne Barlyn and Emily Flitter
WASHINGTON, June 6 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
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
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
DARK POOL CASE
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
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
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
An attorney for Bell said his client "vigorously denies the
An outside attorney for Wedbush said Fillhart had no
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)