Broker-Dealer Litigation - Greenberg Traurig LLP

subordinates’ practice of benefiting hedge fund and individual customers at the expense of the
employee plan customers would likely have been detected by the firm.
The SEC singled out cooperation and remedial efforts by the firm. When firm discovered
that the SEC had charged one of the hedge fund customers in an unrelated matter, within three
days the firm suspended cross-trading with that hedge fund and commenced an internal
investigation. In addition, the firm promptly terminated the order desk manager for cause and
reported the matter to the SEC.
As a result, the firm consented to a censure, payment of disgorgement in excess of
$23,000,000, including prejudgment interest, and a civil money penalty of $1,000,000. The firm
agreed to retain and bear the cost of an Independent Distribution Consultant to administer the
disgorgement fund under applicable “Fair Funds” provisions. Notably, the SEC expressed stated
that based on the firm’s cooperation, the Commission was declining to impose a civil money
penalty in excess of $1,000,000.
2. FINRA Enforcement Actions
P.2
Department of Enforcement v. Murphy, Complaint No. 2005003610701, 2011 FINRA Discip.
LEXIS 42 (NAC, Oct. 20, 2011).
A FINRA hearing panel found a registered representative liable for disciplinary
violations stemming from discretionary trading he engaged in without written authorization from
his clients or firm. The trading included excessive and unsuitable options trading, churning,
unauthorized trading, and also occurred in conjunction with inaccurate, unbalanced and
misleading communications with customers. The panel also found that the representative’s
direct supervisor failed to supervise him in connection with such conduct. The panel barred the
representative and ordered $591,933.67 in disgorgement. The panel fined the supervisor $25,000
and ordered a six-month suspension from association as a general securities principal and as an
options principal, including a requirement that he re-qualify in those principal capacities.
The supervisor was responsible for approving options agreements, approving customers
to engage in various levels of options trading, and approval all options trades. He reviewed all
options trades daily for suitability, size and frequency. He reviewed “profit and loss” reports and
sales literature sent to customers. The supervisor was found to be aware of numerous “red flags”
concerning a representative’s trading of certain customers accounts, but the action he took in
response, if any, was insufficient. For example, he was aware that the trading in question, which
had been occurring over an extended period of time, had caused concern both to the firm’s
compliance officer, and regulators, but did not mount an adequate supervisory response, taking
definitive action only after state securities officials and FINRA became involved.
On appeal by the respondents, the National Adjudicatory Council affirmed the hearing
panel’s findings, but the sanctions imposed on the supervisor were found to be wholly
insufficient to remedy his failure to supervise, and was therefore increased to a bar in all
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