Massive Insider Trading Scheme Uncovered - Lots of Blame to Share.

A massive insider trading scheme has allegedly been uncovered by the SEC and the DOJ, according to the SEC, involving computer hacking, foreign investors, tens of millions of dollars, and years of trading activity.

Yesterday the Commission announced the filing of charges against 32 defendants, alleging that they hacked their way into computers and traded on stolen nonpublic information regarding corporate earnings announcements from the wire services who were holding earnings releases for the public companies. The press release is online at http://www.sec.gov/news/pressrelease/2015-163.html and the complaint is at the commission’s web site at http://www.sec.gov/litigation/complaints/2015/comp-pr2015-163.pdf.

I have been involved in cases involving allegations of computer fraud, and trading on undisclosed earnings announcements in the past in the URL Guessing cases,  but that was more of a misunderstanding on the part of the SEC Staff and the sloppiness of the issuers, than an organized hack. This case, at least according to the SEC, involves 5 years of advanced computer techniques to hack into two or more (un-named)  newswire services and stealing hundreds of corporate earnings announcements before they were released.

Some investors expressed surprise that the hacking of a wire service could be profitable. After all, there is a very small window of time to get the information and trade on it when you are dealing with earnings reports. One would assume that the earnings reports are delivered to the wire services minutes or an hour before its release.

You would also think that issuers would have learned from the URL Guessing cases. But apparently they have not. According to the SEC’s complaint, some of these issuers were uploading their releases days before the announcement, giving the hackers plenty of time to hack and trade.

For example, according to the complaint, while Zumiez uploaded its press release to the wire service at 1:29 pm for a 4:00 pm release, Acme Packet uploaded its press release at 5:53 pm, for release the next day at 4:05 pm, leaving the press release on a third party server for nearly 24 hours.

According to the complaint, the hacking went on for 5 years, and during that time (2010 until 2014), the hacker defendants hacked into the newswires'  computer systems and stole over 100,000 press releases before they were publicly issued.

And the hacking was apparently profitable. The SEC is alleging that the Defendants made over 100 million dollars in profits. However, keep in mind that the SEC does not concern itself with the losses. Not every trade pans out, and not every trade is profitable. The SEC however is only concerned with profits, and does not count losses.

One has to wonder what these wire services were doing all of these years, and why the hacking was not noticed.

One also has to wonder why the SEC, FINRA, and the exchanges did not notice the irregularities. Granted, we can assume that some of the press releases did not hold valuable information and there were no trades made, but according to the complaint the hackers were downloading press releases for years from the same two wire services.

While the defendants allegedly made significant sums of money, and, according to the SEC, hacked into computers to do so, one has to wonder where the responsibility of the wire services and the issuers lies in all of this.

First, the wire services had their computers hacked for years without noticing the hacks and allowing them to occur with over 100,000 press releases. While the SEC did not identify the wire services, they should have some liability to the shareholders of the issuers involved.

And the issuers – who surely share some of the blame, include Walter Energy, Caterpillar, Inc., Treehouse Foods, RadioShack, Brocade, Panera Bread, and others. Where were they during all of this – uploading their press releases, containing what is apparently very valuable information, days or hours in advance to unsecured third party vendors? Surely that is negligence and a breach of a duty to protect corporate information.

And lastly, the SEC. While they are now issuing press releases about what a great job they did in uncovering this alleged scheme, one has to wonder what the heck took them so long. These defendants are allegedly stealing over 100,000 press releases, for years, and generating millions of dollars in profits and the SEC never catches on until 4 years go by?

Spike in FINRA, SEC Regulation Leaves Star Brokers Exposed

We represent big producers and teams across the country, and have done so for years. While this article presents an unfair characterization of big producers, it makes a good point. FINRA and the SEC are cracking down and firms are looking to maximize profits (which sometimes means getting rid of brokers). None of that is good for brokers, and the  top teams are not immune from the problems.

Brokers need to protect themselves; unfortunately from their own firms as well as overzealous regulators.

Spike in FINRA, SEC regulation leaves star brokers exposed

------------
Mark Astarita represents financial advisers across the country in their regulatory, transition and employment matters. Got a question? Give him a call at 212-509-6544.

SEC Charges ITG With Operating Secret Trading Desk and Misusing Dark Pool Subscriber Trading Information

The Securities and Exchange Commission today announced that ITG Inc. and its affiliate AlterNet Securities have agreed to pay $20.3 million to settle charges that they operated a secret trading desk and misused the confidential trading information of dark pool subscribers.

An SEC investigation found that despite telling the public that it was an “agency-only” broker whose interests don’t conflict with its customers, ITG operated an undisclosed proprietary trading desk known as “Project Omega” for more than a year.  While ITG claimed to protect the confidentiality of its dark pool subscribers’ trading information, during an eight-month period Project Omega accessed live feeds of order and execution information of its subscribers and used it to implement high-frequency algorithmic trading strategies, including one in which it traded against subscribers in ITG’s dark pool called POSIT.

ITG agreed to admit wrongdoing and pay disgorgement of $2,081,034 (the total proprietary revenues generated by Project Omega) plus prejudgment interest of $256,532 and a penalty of $18 million that is the SEC’s largest to date against an alternative trading system.

“ITG created a secret trading desk and misused highly confidential customer order and trading information for its own benefit,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “In doing so, ITG abused the trust of its customers and engaged in conduct justifying the significant sanctions imposed in this case.”

According to the SEC’s order instituting a settled administrative proceeding:

• Project Omega traded a total of approximately 1.3 billion shares, including approximately 262 million shares with unsuspecting subscribers in ITG’s own dark pool.
• Project Omega employed an algorithmic trading strategy called the “Facilitation Strategy” in which it executed trades based on a live feed of information concerning orders that its sell-side subscribers sent to ITG’s algorithms for handling. 
• Project Omega accessed the feed by connecting to a software utility that was used by ITG’s sales and support teams.  As a result, Project Omega had a real-time view of subscriber orders being placed through ITG’s algorithms.
• From April to December 2010, the Facilitation Strategy was designed to detect open orders of sell-side subscribers being handled by ITG.  Based on that information, Project Omega opened positions in displayed markets on the same side of the market as the detected orders, and then closed these positions in POSIT by trading against the detected orders.  By employing this strategy, Project Omega sought to capture the full “bid-ask spread” between the National Best Bid and Offer (NBBO).
• Project Omega had access to the identities of POSIT subscribers and used this information to identify sell-side subscribers and trade with them in the dark pool in connection with the Facilitation Strategy.
• To earn the full “bid-ask spread” in connection with the Facilitation Strategy, Project Omega needed the subscribers with which it traded in POSIT to be configured to trade “aggressively” so that the subscribers would “cross the spread” to trade with Project Omega.  Project Omega took steps to ensure that the sell-side subscribers were configured to trade aggressively in POSIT. 
• Project Omega’s other primary strategy called the “Heatmap Strategy” involved trading on markets other than POSIT based on a live feed of confidential information relating to customer executions in other dark pools.  Based on customer executions, Project Omega’s Heatmap algorithm was designed to open positions in specific securities in displayed markets at the bid or the offer and then close them at midpoint or better in the external dark pools where customers had received midpoint executions.  The goal of this strategy was to earn a “half spread” or better based on knowledge of ITG customers’ executions.

The SEC’s order finds that ITG violated Sections 17(a)(2) and (3) of the Securities Act of 1933 in connection with Project Omega by engaging in a course of business that operated as a fraud and by failing to make disclosures about Project Omega and its proprietary trading activities.  ITG also violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS by failing to amend its Form ATS filings in light of Project Omega’s trading activities in POSIT, failing to establish adequate safeguards, and failing to implement adequate oversight procedures to protect the confidential trading information of POSIT subscribers.

via SEC Press Releases

Financial Advisor IQ - Ex-LPL Team Gets Fewer Headaches at Securities America

Interesting interview with former LPL OSJ about his team's move from LPL to the more responsive Securities America.



Financial Advisor IQ - Ex-LPL Team Gets Fewer Headaches at Securities America



---------

Mark Astarita and the attorneys at Sallah Astarita & Cox, LLC represent brokers and OSJs across the country who are changing, or considering changing, broker dealers. To see if Mark and his team can help your team, give him a call at 212-509-6544.

BlackRock Betting Big Data Can Provide Boost

BlackRock Inc CEO Larry Fink is betting that a trillion points of data can help revive his firm's ailing stock-picking business.

Even though BlackRock replaced many of its fundamental active equity managers over the past few years, a number of the firm's stock-picking funds are underperforming.

Investors have pulled $7.5 billion from the funds over the past year, according to Morningstar.

To address this, the world's largest asset manager is taking the secret data sauce of its team of quantitative managers, academics and data engineers and feeding it to all of its portfolio managers, including its fundamental active equity team.

The goal: to arm its portfolio managers with data to give them an analytical advantage.

The information ranges from satellite images of cars in retailer parking lots to shipping trends to word search analytics in company earnings calls."

More at BlackRock betting big data can help revive its active equity funds

Firms Elect Three Industry Governors to FINRA Board of Governors, Two New Governors Appointed | FINRA.org

FINRA announced the results of voting that took place at its 2015 Annual Meeting  in Washington, D.C. last month. Member firms elected three Governors, one from among the small firms, one from among the mid-size firms and one from among the large firms. FINRA also named two new Governors to its Board of Governors.

Governors Elected

Small Firm Governor: Joe Romano, President, Romano Wealth Management
Mid-size Firm Governor: Brian Kovack, Esq., President & Co-Founder, Kovack Securities, Inc.
Large Firm Governor: John W. Thiel, Head of Merrill Lynch Wealth Management
All three Governors are newly elected.

Governors Appointed

Two individuals were named to the Board as Governors:

Kathleen A. Murphy, President of Personal Investing, a Fidelity Investments company, was appointed as an Industry Governor; and Randal K. Quarles, Managing Partner and Co-Founder of The Cynosure Group, was appointed as a Public Governor.

FINRA Bars Former Caldwell Broker for Churning Customer Accounts

FINRA Bars Former Caldwell Broker for Churning Customer Accounts -The Financial Industry Regulatory Authority (FINRA) announced today that it has permanently barred Richard Adams, a former registered representative of Caldwell International Securities Corp., from the securities industry for churning customers’ accounts and other securities rule violations. Adams also failed to report a dozen unsatisfied judgments and liens on his U4 Registration Form as required by FINRA rules."

What Is Our Attention Really Worth?

Attention is a currency. We choose how to spend it, just like we spend our time and money. But unlike money, there’s no way to store attention for later use.

FINRA Dissident Candidate Wins Board Seat.

Brian Kovack, who ran for the Finra Board of Governors as a self-described "dissident" candidate, won his bid for a seat on the 24-member board, Finra announced Thursday.

UBS Puerto Rico Investment Problems Expand

UBS’ involvement in Puerto Rico investments continues to explode, as the customer arbitrations against the firm start to heat up.  UBS has confirmed that FINRA and the SEC are not only looking into the recommendations of the funds, but now they are investigating the structure of the funds.

This week UBS reported that it is facing criminal investigations into the use of non-purpose loans to invest in closed-end funds, in violation of various agreements and policies.

In 2014 UBS settled allegations with the Office of the Commissioner of Financial Institutions for the Commonwealth of Puerto Rico (OCFI) in connection with OCFI’s examination of UBS’s operations from January 2006 through September 2013. Pursuant to the settlement, UBS contributed $3.5 million to an investor education fund, offered $ 1.68 million in restitution to certain investors and, among other things, committed to undertake an additional review of certain client accounts to determine if additional restitution would be appropriate.

UBS has been defending an onslaught of customer claims from investors in its Puerto Rican bond funds, who claim that the products were improperly structured, and/or were unsuitable for the particular investor.  More information regarding the investigations and arbitration is here.

UBS has been settling the cases with its customers who are making allegations of unsuitable investments; breach of contract and fiduciary duty; negligence; and failure to supervise , as well as violation of Section 10(b) of the Securities Exchange Act, Rule 10b-5 of the Securities Exchange Commission, NYSE and FINRA rules, and the securities laws and other laws and regulations of Puerto Rico; and violation of Article 1802 of the Civil Code of Puerto Rico 31 Laws of Puerto Rico §5141, relating to the purchase and recommendation of UBS’s funds, including Puerto Rico AAA Portfolio Target Maturity Fund and a Note of the Employees Retirement System of Puerto Rico and a variety of Puerto Rico closed-end mutual funds concentrated in Puerto Rico bonds.

For the cases that UBS has not settled, it continues to lose the cases with arbitrators awarding damages to the injured investors.  Just this week a FINRA arbitration panel in San Juan awarded $250,000 to investors against UBS.

Our firm is offering to review the statements, and details regarding these investments from investors and brokers who have been involved with these securities. Call us at 212-509-6544 to see if we can be of assistance.