Monthly Disciplinary Actions - September 2009

NYSE ARCA EQUITIES DISCIPLINARY ACTION
ETP Holder Disciplined for Supervisory Deficiencies, Among Other Violations
JAW Trading LLC
Hearing Board Decision: 09-ARCA-07
11 Sep 2009
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Case Note
Violated NYSE Arca Equities Rule 6.18 by failing to establish appropriate policies and procedures for supervision and control, including a separate system of follow-up and review, reasonably designed to achieve compliance with NYSE Arca Equity rules and policies; violated Section 17(a)(l) of Exchange Act and Rules 17a-4(b)(4) and 17a-4(f) thereunder, and NYSE Arca Equities Rule 2.24 by failing to retain and preserve, and/or to retain in proper format, certain electronic communications relating to business of Firm; violated NYSE Arca Equities Rule 2.21(d) by permitting registered person to continue to perform duties as registered person, without having complied with continuing education requirements; violated NYSE Arca Equities Rule 6.17 by failing to: (a) have anti-money laundering program be approved in writing by representative of its senior management staff, (b) establish and implement policies, procedures and controls that can be reasonably expected to detect and cause reporting of required transactions or to achieve compliance with Bank Secrecy Act, and implementing regulations thereunder, (c) provide for independent testing for compliance with anti-money laundering program, (d) designate individual or individuals responsible for implementing and monitoring day-to-day operations and controls of anti-money laundering program, and (e) provide ongoing training for appropriate personnel; violated Section 17(a) of Exchange Act and Rule 17a-5 thereunder, and NYSE Arca Equities Rules 4.5 and 4.11(a) by filing five incomplete FOCUS Reports; violated NYSE Arca Equities Rule 6.11 by failing to timely file nine notifications of initiation, modification, or termination of financial arrangements– Consent to censure, $10,000 fine and undertaking.

 

Case Summary
JAW Trading LLC of Deerfield Beach, Fla., an NYSE Arca Equities Trading Permit Holder, consented without admitting or denying guilt to findings of supervisory deficiencies, among other violations:

An NYSE Arca Hearing Officer found that the Firm committed certain books-and-records and supervisory deficiencies from 2005 through 2009. In addition, the Firm failed to retain a number of e-mail messages, employed a trader who had not complied with the continuing education requirements, and failed to comply with the anti-money laundering procedures.

NYSE ARCA imposed a penalty of a censure, a $10,000 fine and a requirement to comply with an undertaking to retain an outside consultant, as set forth in the Decision. JAW Trading LLC consented to the penalty.
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NYSE AMEX DISCIPLINARY ACTION
AMEX Member Firm Disciplined for Amex Rule Violations
BNY ConvergEx Execution Solutions LLC
Hearing Board Decision: 09-AMEX-19
11 Sep 2009
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Case Note
Violated Amex Rules 1000-Commentary .04 and 1000A-Commentary .05 by failing to prevent an introducing broker-dealer client from entering limit orders into the firm’s Amex order routing system in the same Portfolio Depositary Receipts and Index Fund Shares for account or accounts of the same or related beneficial owner, in such manner that firm effectively operated as a market maker by holding itself out as willing to buy and sell such Portfolio Depositary Receipts and Index Fund Shares on regular or continuous basis; violated Amex Rule 153(a) and Article XI, Section 3 of Amex Constitution by failing to maintain complete record of every order entered through its order-management system to buy or sell Portfolio Depositary Receipt; violated Amex Rule 411 by failing to learn essential facts relative to each order accepted by the Firm in Portfolio Depositary; violated Amex Rule 320(c) and (e) by failing to provide for appropriate procedures of supervision and control, by failing to establish and maintain appropriate policies, systems and procedures of supervision and control, including written supervisory procedures and by failing to establish separate system of follow-up and review to ensure compliance with Amex Rules 1000-Commentary .04(a) and 1000A-Commentary .05 – Consent to censure and $35,000 fine. 
Case Summary
BNY ConvergEx Execution Solutions LLC of New York City, an Amex member firm, consented without admitting or denying guilt to certain order entry violations.

An NYSE Amex hearing officer found that BNY ConvergEx Execution Solutions LLC violated Amex Rules 1000-Commentary .04 and 1000A-Commentary .05 by allowing entities to enter simultaneous or near simultaneous buy and sell orders in a Portfolio Depositary Receipt and an Index Fund Share for the same beneficial owner during the period June 2004 – October 2004; violated Amex Rule 153 and Article XI, Section 3 of the Amex Constitution by failing to maintain a record of every order transmitted to the Amex Floor during October 2004; violated Amex Rule 411 by failing to learn the essential facts relative to each order accepted by the firm during October 2004; and violated Amex Rule 320 by failing to have adequate procedures of supervision and control in place to detect or prevent violations of Amex Rules 1000-Commentary .04(a) and 1000A-Commentary .05 during the period June 2004 – October 2008.

NYSE Amex imposed a penalty of a censure and $35,000 fine.   BNY ConvergEx Execution Solutions LLC consented to the penalty.

 
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NYSE AMEX DISCIPLINARY ACTION
AMEX Specialist Firms Disciplined
AGS Specialists, L.L.C, AGS Specialists II, L.L.C. and STR Specialists
Hearing Board Decision: 09-AMEX-23-24-25
11 Sep 2009
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Case Note
The firms violated Amex Rule 155, made applicable to options through Amex Rule 950 by failing to give precedence to orders entrusted to them as agent in multiple options before executing at same price purchases or sales in multiple options for accounts in which AGS firms had interest; violated Amex Rules 155 by failing to give precedence to orders entrusted to them as agent in multiple equities before executing at same price purchases or sales in multiple equities for accounts in which AGS firms had interest; violated Regulation NMS Rule 602(b)(2) and Amex Rule 958A-ANTE by failing to honor published quotation, failing to execute option orders upon presentment or executing these orders at prices less favorable than those in published quoted market; violated Amex Rule 231(e) and Regulation NMS Rule 602(b)(2) by failing to honor the published quotation, by failing to execute equity orders upon presentment or executing these orders at prices less favorable than those in the published quoted market; violated Amex Rule 16 by failing to adhere to principles of good business practice in conduct of their affairs, in that they failed to execute market orders in a timely manner; violated Amex Rule 958A(e)  by failing to publish immediately upon receipt the price and size of each customer options limit order held by the specialist that is at price or size that would improve displayed bid or offer in an option that is subject of a limit order; violated Regulation NMS Rule 604 by failing to immediately display customer equity limit orders in the public quotation, when each such order was at a price that would improve specialist’s bid or offer in each such security; or when order was priced equal to the specialist’s bid or offer and the national best bid or offer for each such security, and size of order represents more than de minimis change in relation to size associated with specialist’s bid or offer in each such security; violated Regulation SHO Rule 220 and Amex Rule 957 by failing to accurately mark all sell orders of any securities as “long”, “short” or “short exempt”; violated Amex Rule 191 by failing to provide 191 Data to Amex; violated Amex Rule 232 by failing to issue required ITS pre-opening notifications in eligible securities to other participant markets; violated Amex Rule 16 by failing to post closing prints within 180 seconds of close in a product for which it specialized, in contradiction to principles of good business practice; violated Section 11(a)(1)(A) of Exchange Act, Regulation X, and Amex Rule 958-ANTE(b) by executing option transactions in the firm’s market maker account that did not constitute a course of dealings reasonably calculated to contribute to maintenance of fair and orderly market, therefore improperly causing a clearing firm to extend “good faith” margin for non-market making transactions – Consent to censure and joint and several fine of $125,000.
Case Summary
AGS  Specialists, L.L.C, AGS Specialists II, L.L.C. and STR Specialists, L.L.C. (the “AGS Firms”) of New York City,  former Amex specialists, consented without admitting or denying guilt to trading violations.

An NYSE Amex hearing officer found that from January 2003 through November 2005, the AGS Firms violated Amex Rule 155, made applicable to options through Amex Rule 950, by failing to give precedence to orders entrusted to them as agent in multiple options before executing at the same price purchases or sales in those multiple options for accounts in which the AGS Firms had an interest.  In addition, on various occasions between January 2005 and October 2007, the AGS Firms committed various order handling violations by failing to honor the published quotation, by failing to execute option and equity orders upon presentment or by executing these orders at prices less favorable than those in the published quoted market; by failing to execute market orders in a timely manner; by failing to publish immediately upon receipt the price and size of each customer options limit order held by the specialist that is at a price or size that would improve the displayed bid or offer in the option that is the subject of the limit order; by failing to immediately display customer equity limit orders in its public quotation, when each such order was at a price that would improve the specialist’s bid or offer in each such security; or when the order was priced equal to the specialist’s bid or offer and the national best bid or offer for each such security, and the size of the order represents more than a de minimis change in relation to the size associated with the specialist’s bid or offer in each such security; by failing to accurately mark all sell orders of any securities as “long”, “short” or “short exempt”; by failing to provide 191 Data to the Amex; by failing to issue required ITS pre-opening notifications in eligible securities to other participant markets; by failing to post closing prints within 180 seconds of the close in product for which it specialized; and further, between October 2006 and December 2006 , the AGS Firms executed option transactions in the firm’s market maker account that did not constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market, therefore improperly causing the clearing firm to extend “good faith” margin for non-market making transactions.

NYSE Amex imposed a penalty of a censure and joint and several fine of $125,000.  The AGS Firms consented to the penalty.
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Former Sales Trader Disciplined for Deceptive Practices
Matthew Mills
Hearing Board Decision: 09-NYSE-15
11 Sep 2009
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Case Note
Violated NYSE Rule 476(a)(6) by engaging in deceptive practices with respect to activities involving trading of mutual funds   – Consent to censure, 18-month bar and undertaking.

 

Case Summary
Matthew Mills, a former sales trader, consented without admitting or denying guilt to engaging in deceptive practices with respect to trading in mutual funds.

An NYSE hearing officer found that from on or about January 2000 through September 2003 (the “relevant period”), Mills as a junior trader with Senior Trader A engaged in deceptive practices at Bear, Stearns & Co., through the use of among other things, multiple accounts and multiple registered representative numbers in order to facilitate short-term trades in mutual funds ("market timing"), all for the benefit of several different hedge fund customers.   As a result of Mills and Senior Trader A’s market timing activity, they received more than 100 block and/or stop notices from mutual fund companies. This activity generated in excess of $1 million in gross revenues for the firm.[1]
  
NYSE imposed a penalty of a censure, 18-month bar and an undertaking to cooperate with the staff of NYSE in any litigation or ongoing investigation in this matter and related matters.  Mills consented to the penalty.
 

1]    Enforcement’s investigations into the mutual fund trading at the firm, including deceptive market timing at BS&Co. during the relevant period, resulted in two disciplinary actions.  In Bear, Stearns & Co. Inc., Decision 05-169 and Bear, Stearns Securities Corp. , Decision 05-170 (NYSE Hearing Board March 10, 2006), the Firm and Bear, Stearns Securities Corp. consented to a censure, a fine of $90 million, and disgorgement of $160 million and appropriate undertakings with the Securities and Exchange Commission and NYSE.
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NYSE AMEX DISCIPLINARY ACTION
AMEX Specialist Firm Disciplined for Amex Rule Violations
Kellogg Capital Group, LLC
Hearing Board Decision: 09-AMEX-20
11 Sep 2009
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Case Note
Violated Amex Rule 155 by failing to give precedence to orders entrusted to it as agent in multiple equities before executing at the same price purchases or sales in those multiple equities for accounts in which the firm had interest; violated Amex Rule 155, made applicable to options by Amex Rule 950, by failing to give precedence to orders entrusted to it as agent in multiple option contracts before executing at the same price purchases or sales in those multiple option contracts for accounts in which the firm had interest; violated Exchange Act Rule 11Ac1-1, Regulation NMS Rule 602(b)(2) and Amex Rule 231(e) by failing to honor published quotation by failing to execute certain equity orders and ITS commitments upon presentment or by executing these orders at prices less favorable than those in published quoted market; violated Exchange Act Rule 11Ac1-4, Regulation NMS Rule 602(b)(2), Amex Rule 958A-ANTE and Amex Rule 941-ANTE, by failing to honor published quotation by failing to execute certain options and linkage orders upon presentment or by executing these orders at prices less favorable than those in the published quoted market; violated Exchange Rule 11Ac1-4 and Regulation NMS Rule 604 by failing to immediately display customer equity limit orders in its public quotation, when each such order was at price that would improve specialist’s bid or offer in each such security, or when order was priced equal to specialist’s bid or offer and national best bid or offer for each such security, and size of order represents more than de minimis change in relation to size associated with specialist’s bid or offer in each such security; violated Amex Rule 16 by failing to adhere to principles of good business practice in conduct of their affairs, by failing to execute market orders in timely manner, by failing to post closing prints within 180 seconds of the close in products for which it specialized, and by disseminating a quote that locked or crossed quoted market of another ITS participant and then failing to promptly unlock or uncross the ITS participant’s market; violated Amex Rule 232 by failing to issue required ITS pre-opening notifications in eligible listed securities to other participant markets; violated Amex Rule 943(a) by disseminating a quote that locked or crossed an away market, and failing to promptly unlock or uncross the away market, by sending an additional linkage order or re-quoting the market; violated Rule 128A-AEMI (g) by failing to attempt to pair off remaining imbalances within 10 seconds in order to re-enable automatic execution after being presented with buy or sell imbalance that had locked or crossed AEMI Book and Auto-ex had been disabled – Consent to censure and $75,000 fine.
Case Summary
Kellogg Capital Group, LLC of New York City, former Amex specialists, consented without admitting or denying guilt to trading violations.

An NYSE Amex hearing officer found that Kellogg Capital Group, LLC (“Kellogg”) violated Amex Rule 155 during the period of March 2005 through November 2006, by failing to give precedence to orders entrusted to it as agent in multiple equities before executing at the same price purchases or sales in those multiple equities for accounts in which the firm had an interest; violated Amex Rule 155, made applicable to options by Amex Rule 950, during the period of February 2004 through August 2005, by failing to give precedence to orders entrusted to it as agent in multiple option contracts before executing at the same price purchases or sales in those multiple option contracts for accounts in which the firm had an interest, In addition, on various occasions between June 2005 through August 2008, Kellogg committed various order handling violations by; failing to honor the published quotation by either failing to execute certain equity orders and ITS commitments, option and Linkgage orders, upon presentment or by executing these orders at prices less favorable than those in the published quoted market, by failing to immediately display customer equity limit orders in its public quotation, when each such order was at a price that would improve the specialist’s bid or offer in each such security; or when the order was priced equal to the specialist’s bid or offer and the national best bid or offer for each such security, and the size of the order represents more than a de minimis change in relation to the size associated with the specialist’s bid or offer in each such security; failing to execute market orders in a timely manner, by failing to issue required ITS pre-opening notifications,by failing to post closing prints within 180 seconds of the close in products for which it specialized, disseminating a quote that locked or crossed the quoted market of another ITS participant and then failed to promptly unlock or uncross the ITS participant’s market,disseminating a quote that locked or crossed the away market, and failing to promptly unlock or uncross the away market, by sending an additional Linkage order or re-quoting the market,by failing to attempt to pair-off remaining imbalances within ten seconds in order to re-enable auto-Ex after being presented with a buy or sell imbalance that had locked or crossed the AEMI Book and Auto-Ex had been disabled. 

NYSE Amex imposed a penalty of a censure and $75,000 fine.   Kellogg Capital Group consented to the penalty.
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Member Firm Disciplined for Trading Ahead of Customer Orders
Morgan Stanley & Co. Incorporated
Hearing Board Decision: 09-NYSE-16
11 Sep 2009
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Case Note
Violated NYSE Rule 92(a) by on 26 occasions entering proprietary orders to buy/sell NYSE-listed security while knowingly in possession of a customer order to buy/sell such security, which could be executed at the same price; violated NYSE Rule 401 on five occasions by failing to conduct its business affairs in accordance with principles of good business practice by not documenting whether it had obtained a customer’s consent to trade along with, or ahead of, its order, or whether a customer had instructed the firm to temporarily stop trading its order – Consent to censure and $200,000 fine.
Case Summary
Morgan Stanley & Co. Incorporated  of New York City consented without admitting or denying guilt to trading violations.
  • During the period Jan. 7, 2005 through Dec. 31, 2008 (the “relevant period”), Morgan Stanley violated NYSE Rule 92(a) on 26 occasions by: (i) on 11 occasions, trading along with or trading ahead of a customer order without consent to do so; and (ii) on 15 occasions, obtaining and documenting the consent it received from customers to trade along with the customers’ orders, but allocating certain executions between the firm’s proprietary account and the customers’ accounts in amounts different from the documented consent granted by the customers without obtaining the customers’ consent to modify the terms of their original documented consent to trade along.[1]
  • Additionally, during the relevant period, Morgan Stanley violated NYSE Rule 401 on five occasions by: (i) on four occasions, failing to document whether it had obtained a customer’s NYSE Rule 92(b) consent to trade along with or trade ahead of the customer’s order; and (ii) on one occasion, failing to document a customer’s instruction to temporarily halt trading that customer’s order.
NYSE imposed a penalty of a censure and $200,000 fine.  Morgan Stanley consented to the penalty.

 
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NYSE AMEX DISCIPLINARY ACTION
AMEX Member Disciplined for Amex Rule Violations and Supervisory Deficiencies
Heights Partners, Inc.
Hearing Board Decision: 09-AMEX-18
11 Sep 2009
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Case Note
Violated Amex Rule 950(c) Commentary .03 by failing to appropriately identify to the Exchange crowd that the sell side of an order was on behalf of a broker-dealer; violated Amex Rule 950(d) Commentary .02 by inappropriately disclosing to the Exchange crowd that the sell side of an order was on behalf of a public customer and inappropriately disclosing on its order ticket and to the Exchange crowd that the buy side of an order was on behalf of a public customer; violated Amex Rule 411 by failing to use due diligence to learn essential facts relative to an order; violated Amex Rule 153 by failing to maintain accurate record of an order transmitted to the Exchange Floor; violated Amex Rule 320 by failing to provide for adequate supervision to ensure compliance with order-identification requirements including failing to properly implement the firm’s written supervisory procedures with respect to evidencing supervisory reviews and approvals, and failing to ensure that employees followed established written supervisory procedures of Firm with respect to properly identifying orders – Consent to censure and $15,000 fine. 
Case Summary
Heights Partners, Inc. of New York City, an Amex member firm, consented without admitting or denying guilt to trading violations and supervisory deficiencies. 

An NYSE Amex hearing officer found that Heights Partners, Inc. violated Amex Rule 950(c) Commentary .03 by failing to appropriately identify to the Exchange crowd that the sell side of an option order was on behalf of a broker-dealer;   violated Amex Rule 950(d) Commentary .02 by (i) inappropriately disclosing to the Exchange crowd that the sell side of an option order was on behalf of a public customer; and (ii) inappropriately disclosing on its order ticket and to the Exchange crowd that the buy side of an option order was on behalf of a public customer; violated Amex Rule 411 by failing to use due diligence to learn the essential facts relative to an option order; violated Amex Rule 153 by failing to maintain an accurate record of an option order transmitted to the Exchange Floor; violated Amex Rule 320 by failing to provide for adequate supervision to ensure compliance with the order identification requirements of the Amex, including failing to properly implement the firm’s written supervisory procedures with respect to evidencing supervisory reviews and approvals, and failing to ensure that employees followed the established written supervisory procedures of the firm with respect to properly identifying orders.

NYSE Amex imposed a penalty of a censure and $15,000 fine.   Heights Partners consented to the penalty.
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NYSE ARCA EQUITIES DISCIPLINARY ACTION
ETP Holder Fined for Supervisory Deficiencies
Deutsche Bank Securities, Inc.
Hearing Board Decision: 09-ARCA-08
11 Sep 2009
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Case Note
Violated NYSE Arca Equities Rule 6.18(b) and (c) 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, with respect to odd lot transactions on NYSE Arca Marketplace – Consent to censure and $50,000 fine.
Case Summary
Deutsche Bank Securities, Inc. of New York City, an NYSE Arca Equities Trading Permit holder, consented without admitting or denying guilt to findings of supervisory deficiencies with respect to odd lot transactions on the NYSE Arca Marketplace:

An NYSE Arca Hearing Officer found that the Firm committed supervisory violations and failed to implement adequate controls, including a reasonable system of follow up and review, designed to achieve compliance with NYSE Arca Equities Rules pertaining to odd-lot transactions. From Jan. 25, 2007 through April 2007, despite being on notice from NYSE Arca Equities that the Firm had deficiencies relating to its supervisory systems and procedures with respect to monitoring odd lot transactions, the Firm failed to implement odd-lot supervisory procedures and an odd-lot surveillance and exception report to capture odd-lot transactions entered on the NYSE Arca Marketplace via one of its trading platforms, resulting in its failure to detect and prevent the odd lot violations of its customersthough prior to Jan. 5, 2007 the Firm had put in place a surveillance report to capture odd-lot transactions entered by DMA customers via another of its trading platforms, the Firm implemented a material change to the report without undertaking a reasonable review of such change or modified report, resulting in the Firm’s failure to detect and prevent the odd lot violations of its customers. All of the foregoing conduct constituted a violation of NYSE Arca Equities Rules 6.18(b) and (c).

NYSE Arca imposed a penalty of a censure and a $50,000 fine. Deutsche Bank Securities, Inc. consented to the penalty.
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