Monthly Disciplinary Actions - January 2010

Member Firm Disciplined for Violations Involving Algorithmic Trading
Credit Suisse Securities (USA) LLC
Hearing Board Decision: 09-NYSE-24
13 Jan 2010
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Case Note
Violated NYSE Rule 342 by failing to adequately supervise development, deployment and operation of proprietary algorithm, including failure to implement procedures to monitor certain modifications made to algorithm; violated NYSE Rule 401 by failing to adhere to principles of good business practice in that: (i) firm proprietary algorithm did not have appropriate checks designed to prevent submission of hundreds of thousands of erroneous messages or to alert Firm in event of rejected messages; (ii) firm proprietary algorithm sent hundreds of thousands of cancel and replace requests for orders that had not been sent to NYSE; and/or (iii) firm failed to detect hundreds of thousands of cancel and replace requests and reject messages – Consent to censure and $150,000 fine.
Case Summary
Credit Suisse Securities (USA) LLC of New York City, a member firm, consented without admitting or denying guilt to failing to adhere to principles of good business practice:
 
An NYSE hearing officer found that Credit Suisse failed to adhere to the principles of good business practice in that on Nov. 14, 2007, beginning at approximately 3:40 p.m., a Credit Suisse proprietary algorithm routed hundreds of thousands of cancel/replace requests to the New York Stock Exchange for orders that had been previously generated by the algorithm, but, due to an unforeseen programming issue, were never sent by the algorithm.   The unusually large amount of cancel/replace messages contributed to the over-queuing of message traffic in all of the securities, approximately 975 in total, traded at five posts on the NYSE Trading Floor.  Messages, including new orders, modifications of orders, and cancellation requests were frozen in queue and could not be immediately processed.  These five posts could not be closed on time, ultimately closing between 4:10 p.m. and 4:27 p.m.
 
Credit Suisse violated NYSE Rule 342 by failing to properly supervise the development and implementation of the firm’s proprietary algorithm, particularly with respect to certain revisions to the algorithm that contributed to the Nov. 14 incident.  The firm also failed to properly monitor the operation of the algorithm, as evidenced by the fact that the firm was unaware that hundreds of thousands of messages sent by the algorithm were being rejected by NYSE systems until being notified of the issue by NYSE Regulation the following day.  These failures by the firm also constituted a bad business practice in violation of NYSE Rule 401. 
 
The NYSE imposed a penalty of a censure and $150,000 fine.  Credit Suisse Securities (USA) LLC consented to the penalty.
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NYSE ARCA OPTIONS DISCIPLINARY ACTION
OTP Holder Disciplined for Books and Records Violations
Cutler Group L.P.
Hearing Board Decision: 09-ARCA-12
13 Jan 2010
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Case Note
Violated Section 17(a)(1) of Exchange Act, and Rules 17a-4(b)(4) and 17a-4(f) thereunder, and NYSE Arca Options Rule 11.16(a) by failing to preserve business-related e-mail and instant messages in non-rewriteable, non-erasable format, and by failing to preserve business-related fax communications; violated NYSE Arca Options Rule 11.3—Commentary .03 by failing to maintain complete and accurate list of accounts in which employees had direct or indirect financial interest, and by failing to obtain, maintain and review monthly account statements for accounts in which employees had direct or indirect financial interest; violated NYSE Arca Options Rule 11.3(a) by failing to establish, maintain, or enforce adequate written policies and procedures reasonably designed to prevent misuse of material, non-public information by employees; violated Section 17(a)(1) of Exchange Act, and Rule 17a-3(a)(12) thereunder, and NYSE Arca Options Rule 11.16(a), by failing to appropriately conduct and document background checks of employees prior to employment, and by failing to properly retain and preserve manually signed Forms U-4; violated NYSE Arca Options Rule 11.18 by failing to establish, maintain, and/or enforce appropriate written policies and procedures for supervision and control, including separate system of follow-up and review, in following areas: (a) conducting and documenting background checks of  employees prior to employment, including maintaining complete and accurate signed Forms U-4; (b) retention in proper format and review of business-related e-mails, instant messages and faxes sent or received by employees; and (c) prevention of misuse of material, non-public information by employees - Consent to censure and $20,000 fine.
Case Summary
Cutler Group L.P.  of Chicago, Ill. and San Francisco, Calif., an NYSE Arca Options trading permit holder, without admitting or denying guilt, consented to findings of multiple violations, including primarily books and records violations.

An NYSE Arca hearing officer found that Cutler Group's violative activity included: failure to preserve certain electronic communications in the required format; failure to maintain a complete and accurate list of accounts in which its employees had a direct or indirect financial interest; failure to obtain, maintain and review monthly account statements for accounts in which its employees had a direct or indirect financial interest; failure to file a complete and accurate annual acknowledgment attestation with the exchange; failure to appropriately conduct background checks of its associated persons; and failure to establish, maintain, and/or enforce appropriate written policies and procedures for supervision and control, including a separate system of follow-up and review, with respect to certain of the foregoing areas.

NYSE Arca imposed a penalty of a censure and $20,000 fine.  Cutler Group, L.P. consented to the penalty.

 

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NYSE AMEX DISCIPLINARY ACTION
NYSE Amex Member Firm Disciplined for Failure to File Short Interest Reports
EWT, LLC
Hearing Board Decision: 09-AMEX-34
13 Jan 2010
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Case Note
Violated Amex Rule 30 and Article V, Section 4(h) of Amex Constitution by failing to file mid-month short interest reports, end-of-month short interest reports, and weekly short sale reports; violated Amex Rule 320(e) by failing to establish and maintain appropriate policies, systems, and procedures of supervision and control, including written supervisory procedures, and separate system of follow-up and review for compliance with short interest, short sale, and transaction reporting requirements of Amex – Consent to censure and $35,000 fine.
Case Summary
EWT, LLC of Beverly Hills, Calif., an NYSE Amex member firm, consented without admitting or denying guilt to failing to file short interest reports:
 
An NYSE Amex hearing officer found that during the period January 2002 through December 2002, EWT failed to file its mid-month short interest reports; during the period January 2002 through March 2006, EWT failed to file its end-of-month short interest reports, and during the period January 2002 through September 2005, EWT failed to file weekly Form 1-S[1] and Form 1-RA.[2]


[1]    In the filing of the Form 1-S, firms reported to the Amex the total round lot short sale transactions in all stocks and warrants admitted to dealings and in certificates of deposit or other certificates traded on the AMEX which were or are to be cleared or settled by the reporting member organization.

[2]     In the filing of the Form 1-RA, firms reported to the Amex total round lot purchases and sales and total round lot short sales initiated from off-floor and executed on the Amex, in all stocks (or American Depository Receipts) and warrants for all accounts of (i) regular and associate members and member organizations, (ii) allied members of regular or associate member organizations, and (iii) accounts in which any of these has a direct or indirect interest.

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NYSE AMEX DISCIPLINARY ACTION
Former Amex Member Disciplined for Books and Records Violations
William M. Begley, Jr.
Hearing Board Decision: 09-AMEX-33
13 Jan 2010
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Case Note
Violated Amex Rule 324 and Exchange Act   Rules17a-3(a)(2) and (11) by failing to prepare general ledger that reflected all assets, liabilities, income, expense and capital accounts, failing to prepare complete and accurate record of compensation arrangement, and failing to prepare accurate trial balance; violated Amex Rule 153 and Exchange Act Rule 17a-3(a)(6) by failing to prepare accurate order tickets on 75 occasions; violated Amex Rule 30 and Exchange Act Rule 17a-5(a)(2)(iii) by failing to file accurate FOCUS Reports and Schedule 1; violated Amex Rule 320(c) by failing to adopt and implement written supervisory procedures - Consent to censure and 60-day bar.
Case Summary
William M. Begley, Jr. of Monroe, N.J., a former Amex member, consented without admitting or denying guilt to books and records violations:
 
An NYSE Amex hearing officer found that Begley violated Amex Rule 324, Exchange Act Rules 17a-3(a)(2) and 17a-3(a)(11) by failing to keep accurate books and records (i.e., general ledger, trial balance, and a compensation arrangement); violated Amex Rule 30 and  Exchange Act Rule 17a-3(a)(6)  by failing to submit accurate periodic FOCUS reports; violated Amex Rule 153 and Exchange Act Rule 17a-3(a)(6) by failing to keep accurate order tickets and violated Amex Rule 320 by failing to have supervisory and compliance procedures in place, including a lack of written supervisory procedures.
 
NYSE Amex imposed a penalty of a censure and 60-day bar.  William M. Begley, Jr. consented to the penalty.
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NYSE ARCA EQUITIES DISCIPLINARY ACTION
Chief Compliance Officer Disciplined for Failing to Timely Pay Fine
Naum Voloshin
Hearing Board Decision: 09-ARCA-BCCD-01
13 Jan 2010
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Case Note
Violated NYSE Arca Equities Rule 6.2(b) by engaging in conduct inconsistent with just and equitable principles of trade by failing to timely pay a fine imposed on him pursuant to NYSE Arca Equities Rule 10.12 (Minor Rule Plan)
Case Summary
The Business Conduct Committee of NYSE Arca, Inc. considered a Charge Memorandum issued by the Division of Enforcement of NYSE Regulation, Inc. against Naum Voloshin of Los Angeles, Calif., a Managing Partner and Chief Compliance Officer with Pinnacle Securities, L.P. ("Pinnacle"), a former NYSE Arca ETP holder and found Voloshin guilty of violating NYSE Arca Equities Rule 6.2(b) by engaging in conduct inconsistent with just and equitable principles of trade by failing to timely pay a fine imposed on him pursuant to NYSE Arca Equities Rule 10.12.   The fine had been imposed for failing to timely submit information to NYSE Arca examiners.

The NYSE Arca Business Conduct Committee imposed a penalty of a censure, a bar until the respondent satisfies the fine, and after the fine has been satisfied, a further bar of three months.

 

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Individual Disciplined for Violation Involving Mutual Fund Market Timing
Brian Malat
Hearing Board Decision: 09-NYSE-25
13 Jan 2010
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Case Note
Violated NYSE Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade by engaging in improper practices with respect to mutual fund market timing that resulted in mutual funds accepting certain trades that they otherwise would have rejected – Consent to censure and two-year bar.
Case Summary
Brian Malat of New York City, a former registered representative, consented without admitting or denying guilt to engaging in conduct inconsistent with just and equitable principles of trade.

An NYSE hearing officer found that Malat violated NYSE Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade by engaging in improper practices with respect to mutual fund market timing that resulted in mutual funds accepting certain trades that they otherwise would have rejected.

The NYSE imposed a penalty of a censure and two-year bar. Brian Malat consented to the penalty.

 

 

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