Broker-Dealer Litigation - Greenberg Traurig LLP

activity, including activity in the accounts of the president’s customers. The chief compliance
officer was also responsible for reviewing correspondence, including reviewing e-mail and other
electronic correspondence on a regular basis. The chief compliance officer did not adequately
review electronic correspondence or activity in the president’s customer accounts. The president
sent the false trade confirmations and account statements to the customer by e-mail which was
not customary and should have raised a red flag. If the chief compliance officer had reviewed
the transactions in the customer’s accounts for suitability in accordance with the supervisory
guidelines, he likely would have discovered the discrepancy between the actual activity in the
accounts and the activity that was being reported to the customer. The chief compliance officer
also failed to follow up on red flags including insufficient funds in the customer’s accounts and
shortfalls being paid from another account. As a result of this conduct, the chief compliance
officer failed to reasonably supervise within the meaning of Section 15(b)(4)(E) of the Exchange
Act, with a view to preventing and detecting violations of the federal securities laws. Without
admitting or denying the allegations, the chief compliance officer accepted a bar from
association with any broker, dealer, or investment advisor with the right to reapply for
association after one year. No monetary penalty was imposed.
In re Gilford Sec., Inc., Release Nos. 9264 & 65450, 2011 SEC LEXIS 3419 (Sept. 30, 2011).
The Securities and Exchange Commission instituted public administrative cease-anddesist
proceedings against a broker-dealer and several of its corporate officers (collectively,
“respondents”). In anticipation of the institution of the proceedings, the respondents submitted
an offer of settlement which the SEC accepted. The SEC alleged that respondents failed to
reasonably supervise a registered representative who was making unregistered sales of millions
of shares in connection with international pump-and-dump schemes. The registered
representative, along with individuals unconnected with the broker-dealer, perpetuated the fraud
by paying for false spam e-mail campaigns that often caused sudden spikes in both price and
volume of certain mid-cap stocks. The registered representative and his cohorts then sold
millions of shares of these securities into the hyped market through the customer accounts at the
broker-dealer and another firm, reaping millions of dollars in profits. The broker-dealer
allegedly did not have a system to implement policies and procedures regarding the prevention
and detection of violations of Section 5 of the Securities Act of 1933. The broker-dealer
allegedly ignored obvious red flags concerning the unregistered re-sales and did not implement
its policies with respect to reviewing order tickets to detect unusual trading patterns. The CEO
failed to ensure that the broker-dealer had systems to implement its policies and procedures
regarding sales of securities through customer accounts in potential violation of the Securities
Act. He also failed to reasonably supervise the registered representative because he failed to
respond to red flags that should have alerted him to the illegal sales. The sales manager failed to
follow the broker-dealer’s policies and procedures relating to the review of internal e-mail
correspondence and failed to respond to red flags that should have alerted him to the
representative’s misconduct. The research and compliance officer knew or should have known
that the registered representative’s suspicious activity would trigger the broker-dealer’s
obligation to file a suspicious activity report. Without admitting or denying the allegations, the
broker-dealer consented to a censure and disgorgement of $275,000, prejudgment interest of
$77,113, and a fine of $260,000. The corporate officers accepted varying penalties, some
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