Securities Law Prof Blog

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

Friday, March 13, 2009

Six CHX Specialist Firms Settle SEC Charges

The SEC announced that on March 11, 2009, the United States District Judge for the Southern District of New York entered Final Consent Judgments in the Commission's previously filed cases against six specialist firms operating on the Chicago Stock Exchange (CHX): Automated Trading Desk Specialists, LLC, E*Trade Capital Markets LLC, Melvin Securities, LLC, Melvin & Company, LLC, Sydan, LP and Tradelink, LLC (collectively, the Defendants). The Court enjoined each of the Defendants from future violations of CHX Rule 17, and Section 17(a)(1) of the Securities Exchange Act of 1934 and Rule 17a-3 thereunder, and ordered the payment of disgorgement and civil penalties totaling in the aggregate more than $42.3 million. The Defendants consented to the entry of the orders without admitting or denying the allegations of the Commission's complaints.

The complaints, filed on March 4, 2009, charge each Defendant with engaging in unlawful proprietary trading on the CHX. In the complaints, the Commission alleges that the Defendants failed to meet their basic obligation as specialists to serve public customer orders over their own proprietary interests while executing trades on the CHX. As specialists operating on the CHX, each of the Defendants had a general duty to match executable public customer or "agency" buy and sell orders and not to fill customer orders through trades from the specialist firm's own accounts when those customer orders could be matched with other customer orders. However, from 1999 through 2005, each Defendant violated this obligation by filling orders through proprietary trades rather than through other customer orders. The complaints further allege that, during the relevant period, each of the Defendants failed to make or keep current a blotter containing an itemized daily record of all purchases and sales of securities effected by it for its proprietary accounts.

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