Broker-Dealer Litigation - Greenberg Traurig LLP

and hedge fund accounts, to the detriment of certain employee stock purchase plans and similar
accounts. Specifically, Shaw and other traders under his direction manipulated time delays in
systems for executing and reporting agency cross trades to obtain the lower prices to benefit the
hedge funds and conversely, the higher prices for the plan customers. The order desk was paid
commissions on both sides of each cross trade, with the hedge funds generally paying greater
commissions than plan customers. The Commission ordered Shaw to cease and desist from
violating the antifraud provisions of the federal securities laws, barred him from association, and
ordered him to pay a $150,000 civil fine, disgorge $195,300 and pay $23,291 in prejudgment
interest. The Commission further created a Fair Fund pursuant to Section 308(a) of the
Sarbanes-Oxley Act of 2002 for purposes of administering the proceeds of the settlement, and
Shaw agreed not to seek any offset of the civil fine imposed by the Commission based on any
offset that might be ordered in any related investor action.
Q.1.e(iv)
In re Melhado, Flynn & Associates, Inc.,, Release No. 64467, 2011 SEC LEXIS 1662 (May 11,
2011); In re Melhado, Flynn & Associates, Inc.,, Release No. 64468, 2011 SEC LEXIS 1663
(May 11, 2011); In re Melhado, Flynn & Associates, Inc.,, Release No. 64469, 2011 SEC LEXIS
1664 (May 11, 2011).
The Commission accepted offers of settlement from Melhado, Flynn & Associates, Inc., a
dually registered broker-dealer and investment adviser (the “Firm”), McCarthy, a Financial and
Operations Principal, and later, the Director of Compliance Coordination at the Firm, and Motz,
the President, CEO, Director and CCO at the Firm. In an earlier proceeding brought by the
Commission in federal district court, Motz pleaded guilty to securities fraud and the court
sentenced him to eight years in prison, with three years of supervised release and ordered him to
pay $864,806 in restitution. The Commission alleged that, from 2001 through approximately
September 2003, Motz effectuated a cherry-picking trading scheme whereby he would submit
equity orders to the Firm’s trading desk in the morning, but wait until later in the day to decide
whether to allocate the orders to the Firm’s proprietary account or to advisory clients. The trades
that were allocated to the Firm’s proprietary account were profitable 98% of the time, and
yielded a net gain of $1.4 million. The Commission further alleged that during an SEC
examination, Motz, with the assistance of McCarthy, who was aware of the late-day trade
allocation practices, altered certain order tickets to conceal the practices from regulators. The
Commission also alleged the Firm filed a misleading Form ADV because the Firm did not
disclose that proprietary trades could received prices more favorable than those allocated to
advisory clients.
The Commission ordered Respondents to cease and desist from committing or causing
any violations and any future violations of the anti-fraud provisions of the federal securities laws.
The Commission also revoked the Firm’s registrations and barred McCarthy and Motz from
association. The Commission further ordered Motz to pay disgorgement and prejudgment
interest totaling $864,806, but deemed those satisfied by the restitution ordered in the criminal
case. Based upon evidence of the Firm’s inability to pay, and given the revocation of the Firm’s
registrations, the Commission declined to impose a penalty against it. Based upon evidence of
McCarthy’s inability to pay, the Firm declined to impose a penalty against her. Based upon the
prison sentence imposed on Motz, the Commission declined to impose a penalty against him.
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