NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.

KDC Merger Arbitrage Fund, LP
AWC/2007010580901

Employees of the firm's securities lending department knowingly made false entries into the firm’s system indicating that finders had been used to locate securities or counterparties when in fact the finders had performed no legitimate services. The Firm made payments to those purported finders and the finders subsequently paid a portion of their ill-gotten payments directly to the firm employees who made the finder entries into the firm’s system. These employees were indicted for their activities and pled guilty to charges of conspiracy to commit wire fraud, and another firm employee also caused the firm to pay finders in transactions for which he knew or should have known that the finders performed no services, but he was not criminally charged.

The Firm’s written procedures and guidelines addressing the firm’s use of finders were inadequate and that, while the firm’s procedures required a supervisor to review securities lending transactions on a daily basis, the procedures did not provide guidance to supervisors who assumed that responsibility; the procedures did not instruct the stock loan supervisors as to what they were to look for in reviewing transaction reports, how to determine what stock loan activity, including rates, was to be flagged as suspicious, how they were to review documents, how to maintain documentation of the reviews, or how they were to follow up on any suspicious activity they discovered. The Firm kept insufficient documentary evidence to establish that a supervisor adequately reviewed the firm’s securities lending activities.

Also, the Firm had no written procedures requiring supervisory review of electronic communications or addressing how the supervisor of the securities lending department should review employees’ communications with other employees, counterparties or finders.

In addition, the Firm created and maintained books and records that inaccurately reflected that finders had participated in stock loan transactions and were paid for services rendered when, in certain instances, finders had not performed any function relating to the transactions and had not rendered services to justify the payments. Moreover, the Firm failed to retain, as required, email sent and received via its primary corporate email system and an additional email system and failed to retain, as required, electronic communications using an instant messaging system.

KDC Merger Arbitrage Fund, LP : Censured; Fined $350,000

Tags: Finder Fees    Electronic Communications  Email