Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Wednesday, March 4, 2009

SEC Fines Specialist Firms for Unlawful Proprietary Trading

The SEC brought enforcement actions against 14 specialist firms for unlawful proprietary trading on several regional and options exchanges. The firms agreed to settle the SEC's charges by collectively paying nearly $70 million in disgorgement and penalties.  According to the SEC's order, the firms engaged in improper proprietary trading on the American Stock Exchange, the Chicago Board Options Exchange, and the Philadelphia Stock Exchange. The SEC charged the specialist firms for violating their fundamental obligation to serve public customer orders over their own proprietary interests by "trading ahead" of customer orders, or "interpositioning" the firms' proprietary accounts between customer orders.

The SEC instituted settled administrative and cease-and-desist proceedings against eight specialist firms for unlawful proprietary trading on several regional and options exchanges: Botta Capital Management L.L.C.; Equitec Proprietary Markets LLC; Group One Trading L.P.; Knight Financial Products LLC; Goldman Sachs Execution & Clearing L.P.; SLK-Hull Derivatives LLC; Susquehanna Investment Group; and TD Options LLC.  The SEC filed civil injunctive actions in the United States District Court for the Southern District of New York charging 6 Specialist firms for engaging in unlawful proprietary trading on the Chicago Stock Exchange (CHX). The defendants are Automated Trading Desk Specialists, LLC (ATD); E*Trade Capital Markets LLC (E*Trade); Melvin Securities, L.L.C. (Melvin); Melvin & Company LLC (Melvin Co); Sydan, LP (Sydan); and TradeLink, LLC (TradeLink) (collectively, the Defendants).  Without admitting or denying the allegations set forth in the complaints, the Defendants have consented to the entry of orders permanently enjoining them from engaging in the violations set forth above, and have agreed to disgorge ill-gotten gains totaling in the aggregate over $35.7 million and pay civil penalties totaling more than $6.7 million. The orders are subject to the approval of the Court.

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