Less regulation requires even more compliance

System failure? System backup!
April 5, 2017
FINRA’s April showers bring floods of WSP fines and suspensions
April 19, 2017
Show all

Less regulation requires even more compliance

Deregulation is not yet upon us. Despite the speeches and the focus on K.I.S.S. (Keep It Simple Stupid) regulatory oversight, enforcement by the regulatory alphabet is still with us. Yes, Virginia, there still are regulatory agencies and their auditors are actively rooting on out and punishing bad actors and firms.

Just last week, Judge James Cohn of the U.S. District Court for the Southern District of Florida issued a smack-down (final default judgment) , ordering Relief Defendants Westward International Ltd. and Coucarin Holdings Ltd. to disgorge ill-gotten funds totaling more than $1.77 million in a fraud action ($211,160 and $1,565,480, respectively).

The order arises from a Commodity Futures Trading Commission (CFTC) enforcement anti-fraud action filed against Defendants Neil Pecker and Vision Financial Partners, LLC and Relief Defendants Prometheus Enterprises, Inc., GDCM Trust, Westward, and Coucarin.

What happened?

According to the Court’s findings, Pecker and Vision fraudulently solicited nearly $3 million from 120 individuals in the U.S. and Canada to trade off-exchange binary options. But…they didn’t. Rather than trade binary options on behalf of those clients, Pecker and Vision diverted nearly $2 million of that money to Relief Defendants, including Westward and Coucarin. What did Westward and Coucarin do next? Nothing. Neither firm provided any legitimate service nor had any legitimate entitlement or interest to Pecker/Vision client funds. What did the court say? Pay it back!

However, payback is easier said than done as, according to the CFTC, “orders requiring repayment of funds to victims may not result in the recovery of any money lost, because the wrongdoers may not have sufficient funds or assets” to pay anything back. Ouch!

Still, the CFTC presses on, recently ordering former Citigroup Global Markets Inc. Traders Stephan Gola and Jonathan Brims to pay $350,000 and $200,000 respectively for spoofing in U.S. Treasury and Futures markets, and banning them from playing in the sandbox for six months.

Turns out, that over an 18-month period, each trader placed more than 1,000 orders with the intent to cancel before execution while trading for Citigroup Global Markets. Citigroup Global Markets also did not emerge from the fracas completely unscathed as the CFTC also issued an order against the firm to pay $25 million for spoofing and related supervision failures!  In this last charge, the CFTC reported that five traders placed more than 2,500, etc., etc…

According to CFTC Director of Enforcement Aitan Goelman, “This action shows that registrants with supervisory responsibilities must provide their employees with sufficient training and have in place adequate systems and controls to detect spoofing. Failure to do so will have significant consequences.” In this case, $25 million in consequences.

 Bad actors + Inadequate supervision =   T.R.O.U.B.L.E.

The CFTC found that Citigroup provided insufficient training about spoofing to traders on its U.S. Treasury and U.S. Swaps desk. In fact, most of the traders said the only communication they received about spoofing before or during the “troubles” consisted of a single compliance alert. Worse yet, the CFTC found that Citigroup lacked adequate systems and controls in place to detect spoofing and that even when alerted to a spoofing incident involving one of its traders, a supervisor and other members on the U.S. Treasury desk failed to comply with Citigroup’s then-existing policies regarding reporting violations.

Closing the barn door after

While Citigroup did cooperate during the investigations, even to the extent of self-reporting additional potential spoofs and a promise to improve its supervisory systems, internal controls, etc., closing the barn door after the horses are gone is just another case of too little too late. $25 million too late.

Be prepared. Do the right thing. Protect yourself!

Just as you buy fire insurance (for the one in a hundred million chance that your home will catch fire), protect yourself against the more-and-more -frequent exposures a persistent regulator will root out.

Don’t just hope you’re covered. Protect your firm. Protect yourself. When the regulators come sniffing around, and they will, you’re only at risk when they find something amiss. So don’t give them grist for the mill. Give them what they want when they want it.  Compliance.

As Citigroup, Westward, and Coucarin discovered, bad actors and noncompliance can be costly — to the traders and to their firms. Compliance is so much cheaper! Especially when companies like Patrina are offering comprehensive compliance solutions and compliant data capture, file storage, and records archiving specifically designed for the financial services community.

Let’s talk (212-233-1155). Don’t be a victim. Be safe, secure, and compliant instead.