Broker-Dealer Litigation - Greenberg Traurig LLP

Direct Edge ECN LLC, doing business as DE Route, a registered broker-dealer. The
Commission alleged that, after certain orders were overfilled due to operational errors, the
exchanges decided that DE Route would assume and liquidate the overfilled positions through its
error account, and that Respondents also assumed positions in other securities to facilitate the
resolution. The Commission alleged that the exchanges violated Section 19(b)(1) of the
Securities Exchange Act of 1934 by not filing a proposed rule change concerning the use of the
DE Route error account to assume overfilled or error positions, and Section 19(g)(1) of the
Exchange Act by not complying with their own rules when they allowed DE Route to engage in
activities not approved by the Commission. The operational errors caused approximately 27
million shares of excess trading with a value of approximately $773 million across
approximately one thousand symbols, and the exchanges realized a net loss of $2.1 million in
connection with the positions that were assumed and liquidated. In an attempt to liquidate the
positions quickly, DE Route engaged in short selling activity without marking its orders as short
and without locating the shorted stock prior to effecting the short sales, in violation of Regulation
SHO.
In a separate incident, an EDGX database administrator effectively disabled the
exchange’s ability to process incoming orders, modifications, and cancellations, leading to
member claims totaling over $680,000 in losses. Respondents promptly notified the
Commission staff of this incident, and submitted to the Commission staff a plan of remediation,
which they promptly began to implement. The Commission alleged that EDGX, which
displayed quotations representing that it was operating as an automated trading center, violated
Regulation NMS by not immediately notifying all specified persons when it determined that it
was not capable of displaying quotations that accurately reflected the current state of the market
on EDGX. The Commission censured Respondents and ordered them to cease and desist from
future violations and to comply with certain undertakings.
2. SEC Review of SRO Proceedings
a. Sales Practice Violations
Q.2.a
In re Cody, Release No. 64565, 2011 SEC LEXIS 1862 (May 27, 2011); In re Cody, Release No.
65235, 2011 SEC LEXIS 3041 (Aug. 31, 2011).
The Commission rejected a request for reconsideration by Cody, a former registered
representative. The underlying FINRA hearing panel decision found that Cody violated NASD
Rules 2310 and 2110 and suspended Cody from association for three months, fined him $27,500,
and assessed $8,711 in costs against him. Cody first appealed to the National Adjudicatory
Council, which increased the suspension to one year and otherwise sustained the decision. On
further appeal, the Commission sustained the decision by the National Adjudicatory Council.
The Commission found that Cody recommended unsuitable trades to customers, sent misleading
account summaries and information to customers, and failed to timely disclose two customer
settlement agreements on his Form U-4. The Commission found that this conduct violated
NASD Rules 2310 and 2110, and rejected Cody’s arguments concerning alleged procedural
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