Broker-Dealer Litigation - Greenberg Traurig LLP

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In re Bloomfield, Release No. 416-A, 2011 SEC LEXIS 1457 (Apr. 26, 2011).
An administrative law judge held that a chief compliance officer failed to reasonably
supervise registered representatives in violation of the Securities Exchange Act of 1934. The
registered representatives participated in a market manipulation scheme which involved the
acquisition of large quantities of penny stocks, inflating the stock price, and then selling the
shares at artificially inflated prices. The chief compliance officer could not establish an
affirmative defense under the Exchange Act that there were established procedures and a system
for applying those procedures, which would reasonably be expected to prevent and detect
securities violations. The broker-dealer’s supervisory procedures manual did not contain any
operational procedures for transactions involving low-priced securities like the ones at issue in
the case. The supervisory procedures also did not specify how reviews were to be conducted or
how the chief compliance officer’s quarterly audits would occur. The chief compliance officer
argued that he was not in the direct supervisory chain, that he did not have the ability to control
the actions of the representatives, and that he made tremendous efforts over time to address the
relevant issues. He argued that he ultimately had no choice but to leave the firm when it became
apparent that none of his demands or suggestions would be implemented. The administrative
law judge did not find this testimony credible as it was contradicted by the evidence and the
testimony of other witnesses. Nothing in the record indicated that the registered representatives
attempted to hide their illegal conduct from the chief compliance officer or anyone else at the
firm. The chief compliance officer should have been aware of the red flags and failed to remedy
them. He was also ordered to pay a third tier civil penalty.
In re Divine Capital Mkts., LLC, Release Nos. 9247 & 64998, 2011 SEC LEXIS 2609 (Aug. 1,
2011).
After the initiation of public administrative proceedings against them, a broker-dealer and
its chief executive officer submitted an offer of settlement which the Securities and Exchange
Commission accepted. The chief executive officer acted as the broker-dealer’s chief compliance
officer and was responsible for the supervision of equities, institutional, and retail sales. The
SEC alleged that the chief executive officer failed to reasonably supervise one of the brokerdealer’s
registered representatives by ignoring red flags that a large volume of the registered
representative’s sales constituted an unregistered distribution. The chief executive officer failed
to take appropriate steps to ensure that the sales were either registered or exempt from
registration after being alerted to the registered representative’s activities. In addition, the
broker-dealer’s supervisory policies were inadequate to provide guidance to supervisors
regarding the appropriate inquiry to determine whether the public sale of shares acquired directly
or indirectly from an issuer was prohibited by the Securities Act of 1933. Without admitting or
denying the allegations, the broker-dealer accepted the terms of the settlement, including a
censure, suspension from participating, directly or indirectly, in any offering of a penny stock,
and disgorgement of $33,762, prejudgment interest of $6,921, and a fine of $60,000. The chief
executive officer consented to suspension from association in a supervisory capacity with any
broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agent,
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