The Securities and Exchange Commission (SEC) today charged the U.S. subsidiary of U.K.-based ICAP with fraud for engaging in deceptive broking activity and making material misrepresentations to clients about its trading activities.
As an inter-dealer broker, ICAP Securities USA (ICAP) matches buyers and sellers in over-the-counter markets for different types of securities, such as U.S. Treasurys and MBS, by posting trade information on computer screens accessed by its clients who make trading decisions based partly on such information, explained a released on the SEC Web site posted today.
Inter-dealer brokers with greater trade activity on their screens are often better positioned to attract customer orders and earn more commissions compared with those whose screens reflect little or no trading activity.
The SEC found that ICAP, via its brokers on its U.S. Treasurys desks, showed fictitious flash trades known as "bird" trades on ICAP's screens and disseminated false trade information into the market to attract customer attention to its screens as well as encourage actual trading by these customers. ICAP's customers thought the displayed fake trades to be real and relied on the phony information to make trading decisions.
ICAP agreed to settle the SEC's charges by, among other things, paying $25 million in disgorgement and penalties. The SEC additionally charged five ICAP brokers for aiding and abetting the firm's fraudulent conduct and two senior executives for failing reasonably to supervise the brokers. The individuals have each agreed to pay penalties to settle the SEC's charges.
"It is essential that ICAP and other inter-dealer brokers refrain from engaging in conduct that discredits their privileged position in the marketplace," said Lorin L. Reisner, deputy director of the SEC's division of enforcement. "ICAP engaged in deceptive practices that violated the legal and professional standards required of market participants; our action today demonstrates zero tolerance for such conduct."
The seven individuals at ICAP charged by the SEC are:
Ronald A. Purpora, former President of ICAP North America, ICAP's U.S. parent, and a member of ICAP's global executive management group.
Gregory F. Murphy, the chief operating officer of ICAP.
Peter M. Agola, a broker on the U.S. Treasury long bond desk, and the assistant manager of the desk since 2005.
Ronald Boccio, a broker on the U.S. Treasury five-year desk.
Kevin Cunningham, a broker on the U.S. Treasury shorts desk, and the manager of the desk since 2005.
Donald E. Hoffman, Jr., a broker on the U.S. Treasury 10-year desk until his retirement in 2006.
Anthony Parisi, a broker on the U.S. Treasury five-year desk, and a co-manager of the desk during the relevant period.
According to the SEC's order, ICAP's U.S. Treasury brokers displayed thousands of fictitious flash trades to ICAP's customers between December 2004 and December 2005.
The government agency also found that the firm represented to its off-the-run U.S. Treasury clients that its electronic trading system would follow certain workup protocols for handling customer orders. Such ICAP customers thus expected that their orders, once entered onto ICAP's screens, would be filled according to the workup protocols. But, ICAP's brokers on the U.S. Treasury desks used manual tickets to bypass these protocols and close out of thousands of positions in their ICAP house accounts. This, in effect, rendered ICAP's representations concerning the workup protocols false and misleading. In some cases, ICAP's customers' orders received different treatment than the customers expected pursuant to the workup protocols.
The SEC's order further finds that ICAP prsented itself as a firm that did not engage in trading that subjected its own capital to risk. ICAP's regulatory filings routinely made this point by noting specifically in an instance that the firm "does not engage in proprietary trading."
Over the relevant period, however, two former ICAP brokers on the voice-brokered collateral passthrough MBS desk routinely engaged in profit-seeking proprietary trading that made ICAP's representations regarding proprietary trading false and misleading. The SEC's order also finds that ICAP failed to make and keep certain required books and records on the U.S. Treasury desks as well as the MBS desk.
According to the SEC's order, Purpora and Murphy supervised the respondent brokers on the U.S. Treasury desks, and, despite red flags, failed to prevent and detect the brokers' fictitious flash trades until after the SEC discovered the conduct. Both Purpora and Murphy were aware that the respondent brokers used manual tickets to close out of positions in their house accounts. However, they failed to inquire into the brokers' practices of using manual tickets to circumvent the workup protocols concerning customer orders.
The SEC's order found that ICAP willfully violated Section 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and Section 15C of the Securities Exchange Act of 1934 and 17 CFR Parts 404 and 405. The order also finds that each of the five brokers willfully aided and abetted and caused ICAP's violations of Section 17(a)(2) and 17(a)(3) of the Securities Act, and that Purpora and Murphy failed reasonably to supervise the brokers.
Without admitting or denying the SEC's findings, ICAP agreed to a censure, to cease and desist from committing or causing any violations of Section 17(a)(2) and 17(a)(3) of the Securities Act, Section 15C of the Exchange Act and 17 CFR Parts 404 and 405, and to pay $1 million in disgorgement and $24 million in penalties.
It also agreed to retain an independent consultant to, among other things, review its current controls and compliance mechanisms; its trading activities on all desks to ensure that the violations described in the order are not happening elsewhere at ICAP; and ICAP's books and records pertaining to trading records. Based on its review, the independent consultant will suggest any added policies and procedures that are reasonably designed to ensure that ICAP complies with applicable provisions of the federal securities laws.
Each of the brokers has agreed to cease and desist from committing or causing any violations of Section 17(a)(2) and 17(a)(3) of the Securities Act, also without admitting or denying the SEC's findings. They also agreed to be suspended from association with any broker or dealer for a period of three months and, with the exception of Hoffman, to pay a $100,000 penalty. Hoffman, who retired from ICAP nearly four years ago, has agreed to pay a $50,000 penalty.
Without admitting or denying the SEC's findings, Purpora and Murphy have each agreed to be suspended from association in a supervisory capacity with any broker or dealer for a period of three months and pay a penalty of $100,000.
