Tuesday, March 10, 2009
FINRA announced that it has fined First New York Securities L.L.C. $170,000 for improperly covering short positions with secondary offering shares and related oversight failures. The firm was also ordered to disgorge more than $171,000 in trading profits earned from the prohibited conduct. Four of the firm's former traders who conducted the transactions were fined a total of $95,000.
During the relevant time, the Securities and Exchange Commission — through Rule 105 of Regulation M — prohibited covering a short sale with securities obtained in secondary offerings when the short sale occurs during a specific restricted period — typically five business days — before the secondary offering is priced. A FINRA investigation found that in 2005, the firm and four traders violated Rule 105 in connection with five public offerings by selling shares short during the restricted period and then covering their short positions with shares received through the offering. By engaging in this prohibited conduct, the firm and the four traders effectively eliminated their market risk and earned a profit of $171,504.
FINRA ordered Joseph E. Edelman to pay a fine of $50,000 and Larry Chachkes to pay a fine of $30,000. The other two traders — Michael M. Cho and Kevin A. Williams — were each ordered to pay a fine of $7,500.
In addition, FINRA found that the firm failed to adequately supervise the activities of the four traders and failed to establish and enforce a supervisory system and written supervisory procedures reasonably designed to achieve compliance with, and prevent violations of Rule 105. The firm also was found to have provided inaccurate information in response to an inquiry from FINRA. The communication of the inaccurate information was caused by the firm's failure to have in place adequate supervisory procedures reasonably designed to ensure the firm provided responsive information to regulatory inquiries. The firm also failed to maintain adequate books and records in connection with the subject transactions.
In settling this matter, the firm and the four traders neither admitted nor denied the charges, but consented to the entry of FINRA's findings.