Securities Industry Commentator by Bill Singer Esq

Federal Court Orders California Forex Firm and Its Owners to Pay Over $4 Million for Pool Fraud and Registration Violations (CFTC Release)

SEC Staff Issues Accounting Guidance on "Spring-Loaded" Compensation Awards to Executives (SEC Release)

FINRA Sanctions Traderfield and Principal for Supervision of Excessive Trading and Complaint Reporting

In the Matter of Traderfield Securities, Inc. and Mario Divita, Respondents (FINRA AWC)

The order requires Capson and Sarkar to pay civil monetary penalties of $250,000 and $166,000, respectively. In addition, they and their company, Denari, are required to pay restitution of $3,663,282 to victims of their scheme. The order also imposes a permanent injunction prohibiting the defendants from further violations of the Commodity Exchange Act and CFTC regulations, as charged, permanent registration bans, and five-year trading bans.

Case Background

The order finds that from at least August 2012 to December 2019, the defendants fraudulently solicited participants to invest with Denari, misrepresenting the past profitability of Denari's forex trading. The order also finds the defendants issued false account statements to participants that misrepresented the profitability of their respective interests in the pool; failed to receive pool funds in the pool's name; improperly commingled pool funds; and failed to provide required commodity pool disclosures. Further, the order finds the defendants failed to register with the CFTC as required. The order also finds that Capson made false representations to NFA during an examination conducted on July 15, 2019, when he told NFA representatives that Denari had been trading forex with proprietary funds since 2015, and that Denari did not trade forex for third parties until 2019.

The order appoints Kathy Bazoian Phelps as Permanent Receiver for Denari, to collect and distribute restitution. Phelps has collected and distributed more than $700,000 of funds and more than $2.5 million of securities to satisfy allowed participant claims. However, the CFTC continues to caution victims that restitution orders may not always result in the recovery of money lost, because wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure wrongdoers are held accountable.

Spring-loaded awards are share-based compensation arrangements where a company grants stock options or other awards shortly before it announces market-moving information such as an earnings release with better-than-expected results or the disclosure of a significant transaction.

According to Staff Accounting Bulletin (SAB) No. 120 prepared by the SEC's Office of the Chief Accountant and the Division of Corporation Finance, non-routine spring-loaded grants merit particular scrutiny by those responsible for compensation and financial reporting governance at public companies.

SEC staff believes that as companies measure compensation actually paid to executives, they must consider the impact that the material nonpublic information will have upon release.

In other words, companies should not grant spring-loaded awards under any mistaken belief that they do not have to reflect any of the additional value conveyed to the recipients from the anticipated announcement of material information when recognizing compensation cost for the awards.

Between December 2016 and June 2018, Traderfield failed to establish and maintain a supervisory system, including WSPs, reasonably designed to identify and prevent excessive trading. For example, the WSPs listed designated supervisors for certain representatives at the firm, hut did not list a designated supervisor for all representatives, including Broker A. The WSPs tasked supervisors with reviewing trade blotters, account statements. exception reports. and commission reports to monitor for excessive trading. but did not explain how to identify such trading or how supervisors should respond to such trading. Additionally. Traderfield's supervisors did not review exception reports. as required by the WSPs. in the exercise of their supervisory obligations.

. . .

Between December 2016 and June 2018, Traderfield failed to reasonably supervise Broker A, who was excessively trading his customers' accounts. Between December 2016 and May 2017, the WSPs did not designate a supervisor for Broker A, and no supervisor was reviewing Broker A's trading activity for excessive trading. Although the firm's WSPs still did not designate a supervisor for Broker A, Divita began directly supervising Broker A in September 2017. However, between September 2017 and June 2018. Divita failed to reasonably supervise Broker A. 

Divita did not take reasonable steps to monitor for excessive trading in Broker A's customer accounts. Although Divita knew that Broker A's customers were responsible for a large volume of trades at the firm, Divita did not review exception reports for potential excessive trading. Instead Divita reviewed daily trade reports and simply focused on trading volume. Divita failed to monitor the losses in Broker A's customer accounts, which were significant. Although Divita reviewed certain commission information, he failed to recognize Broker A's high commissions as a red flag. Further, Divita did not consider costs when reviewing Broker A's trading activity and did not consider, or even understand, turnover rates and cost-to-equity ratios.

Traderfield's and Divita's failure to supervise Broker A permitted his excessive trading in Customer accounts to continue. Broker A's trading in l6 customer accounts resulted in annualized turnover ratios ranging from seven to 40, and annualized cost-to-equity ratios ranging from 27% to 173%. Traderfield and Divita did not investigate or otherwise respond reasonably to these red lags of excessive trading. Broker A's trading in the 16 accounts, which was inconsistent with these customers' investment needs and objectives, caused them to be charged a total of $451,057 in commissions and incur a total of $538,057 in losses. 

. . .

Between June 2017 and April 2018, Traderfield failed to comply with its reporting obligations under FINRA Rule 4530. The firm failed to report to FINRA statistical and summary information regarding five customer complaints pertaining to Broker A's trading activity in accounts that were excessively traded. The complaints pertained to commissions charged, account losses, and alleged unauthorized trading. . . .  

• Securities Industry Commentator
• Bill Singer