Friday, March 7, 2008

Unregistered BD Defrauds Day Traders

I am often asked by prospective clients for ways to avoid registration as a broker-dealer. But here is one response that I did not consider - just ignore the registration rules and statutes!

The SEC has announced that it obtained an emergency court order against an unregistered securities day-trading firm in La Jolla, Calif.

Not only was the firm operating as an unregistered broker-dealer, it was defrauding the day traders who traded their own equity through the firm. Offering leverage rations of up to 20:1, the firm was diverting the traders' equity to pay losses by other traders,

According to the SEC, the defendants enticed traders with services unavailable at a registered broker-dealer. As alleged in the complaint, they allowed traders to day-trade without meeting the $25,000 minimum equity requirement under FINRA regulations for such trading. The SEC's complaint also alleges that Tuco received transaction-based compensation for its members' trading, and Tuco's traders conducted substantial day-trading through Tuco's brokerage accounts both in dollar amounts and number of trades. As a result, the firm and its owner earned substantial commissions on the trading as the registered representative for the Tuco principal accounts at the registered broker-dealer.

I guess the thought is that if you are going to violate the federal securities fraud statutes, you might as well go all the way and violate the registration statutes also.

No word on potential liability for the BDs who opened the accounts and permitted the trading.
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