Broker-Dealer Litigation - Greenberg Traurig LLP

Specifically, the firm’s procedures did not require that certain daily trading exception
reports be transmitted to compliance personnel. In addition, which the firm’s written procedures
required that traded tickets be reviewed daily by the firm’s Compliance Director, the review was
suspended when the firm changed clearing brokers, and once the new clearing firm was on
board, the firm did not revise its procedures to provide for review of trade tickets.
In resolution of the charges, the firm agreed to a censure and an undertaking that it would
review and revise, as necessary, currently adopted and implemented procedures concerning
manipulative trading. At a minimum, the firm agreed to adopt and implement procedures
requiring daily review of trade execution blotters and daily exception reports by compliance
personnel. As a result of the firm’s demonstrated inability to pay, the SEC declined to require
the firm to pay a civil money penalty.
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In re Torrey Pines Securities, Inc., Admin. Proc. File No. 3-14230, SEC Release No. 34-64317,
2011 SEC LEXIS 1394 (April 20, 2011); Matter of Smith, Admin. Proc. File No. 3-14229, SEC
Release No. 34-63834, 2011 SEC LEXIS 390 (Feb. 3, 2011).
The SEC charged the firm and Smith, a part-owner of the firm who served as its
President and CEO, and who had overall supervisory responsibility for the firm, with failing
reasonably to supervise a registered representative, Dennis Lee Keating II (“Keating”), in
connection with an unregistered private securities offering from August 2006 to November 2008.
The SEC charged Keating with violating Section 15 (a) of the Exchange Act, the broker-dealer
registration provision of the federal securities laws, by conducting the unregistered private
securities offering outside the scope of his employment with Torrey Pines.
The firm failed reasonably to supervise Keating in that it did not establish reasonable
policies and procedures to assign responsibility for supervising Keating, who was in charge of
the firm’s Corona Office and a part-owner of the firm, such that Keating was permitted to
supervise himself. The firm also failed to develop systems to implement the firm’s procedures
regarding registered representatives’ outside business activities. The SEC noted that other than
annual audits, which it described as “cursory,” there was no review of Keating’s daily
correspondence or telephone calls. Further, although the firm had a policy prohibiting the sale of
securities away from the firm, and a policy requiring reporting of outside business activities,
there was no system for either supervisors or the compliance department to monitor activity to
ensure the prohibitions and reporting requirements were met. Smith shared responsibility for
lack of adequate procedures, as he had the power and responsibility to ensure that such
procedures were placed in effect.
The SEC noted the existence of suspicious events concerning Keating’s outside business
activities, which came to the attention of the firm and Smith, most notably multiple
communications from an individual who had invested in Keating’s private offering. Yet, the
firm did not have procedures in place requiring follow-up on such events by supervisors or
compliance officers, and Smith shared responsibility for the failure to enact such procedures.
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