U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20909 / February 24, 2009
Securities and Exchange Commission v. Victor P. Machado and Frank Lu, United States District Court for the Southern District of New York, Civil Action No. 09-CV-01711 (RMB)
In the Matter of Leumi Investment Services Inc., Exchange Act Rel. No. 34-59437 / February 24, 2009
In the Matter of Oppenheimer & Co. Inc., Exchange Act Rel. No. 34-59438 / February 24, 2009
SEC CHARGES FORMER TRADER VICTOR MACHADO AND FORMER SALESPERSON FRANK LU FOR PARTICIPATING IN FRAUDULENT TRADING SCHEME
Leumi Investment Services Inc. and Oppenheimer & Co. Inc. Each Settle Administrative Proceedings Based on Failures to Supervise Machado and Lu, Respectively
The Securities and Exchange Commission today filed a civil injunctive action against two former registered representatives, Victor P. Machado, a former fixed income trader at two related entities, Leumi Investment Services Inc. ("LISI"), a registered broker-dealer, and Bank Leumi USA ("BLUSA") (collectively "Leumi"), and Frank Lu, a former salesperson at Oppenheimer & Co. Inc. ("OPCO"), a registered broker-dealer and investment adviser, for engaging in a fraudulent trading scheme. Without admitting or denying the allegations in the Complaint, except as to jurisdiction, both Machado and Lu have agreed to settle the action on the terms described below.
As alleged in the Complaint, from May 2003 through mid-August 2004, Machado and Lu engaged in a scheme to direct Leumi's securities order flow to OPCO in exchange for secret gratuities and entertainment that Lu provided to Machado. The Complaint also alleges that as part of the scheme, and in violation of Machado's duties to Leumi's customers, Machado routinely directed a substantial flow of orders to OPCO for execution at prices that were favorable to OPCO and detrimental to Leumi's own customers. The Complaint further alleges that as a result of Machado's and Lu's conduct, Leumi and its customers were harmed by approximately $1.1 million.
According to the allegations in the Complaint, in mid-2003, Machado and Lu agreed that Machado would direct orders to Lu for execution at prices favorable to OPCO, and Lu, in exchange, would provide Machado with frequent and costly gratuities and entertainment. As part of their fraudulent arrangement, the Complaint alleges that Machado and Lu also harmed Leumi's customers by unnecessarily using OPCO as a "middleman" to execute trades with other firms, when Machado could have executed those trades directly with the same firms at prices that were more favorable to Leumi's customers. By engaging in this conduct, the Complaint alleges that Machado and Lu ensured that OPCO realized a quick profit on Leumi's trading with little or no risk.
The SEC's Complaint, filed in the United States District Court for the Southern District of New York, charges Machado and Lu with having violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5. Further, Lu is charged with aiding and abetting Machado's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Machado is charged with aiding and abetting LISI's violations of Section 17(a)(1) of the Exchange Act and Rule 17a-3 thereunder (broker-dealer books and records provisions).
Without admitting or denying the allegations in the Complaint, Machado has consented to the entry of a final judgment that (i) permanently enjoins him from committing, or aiding and abetting, future violations of the above-referenced provisions, and (ii) based on Machado's financial condition, waives the payment of disgorgement and prejudgment interest and does not impose a civil penalty. As part of his settlement, Machado has also agreed to the issuance of an administrative order that bars him from association with any broker or dealer.
Lu has consented to the entry of a final judgment that (i) permanently enjoins him from committing future violations of the antifraud provisions of the federal securities laws referenced above, and (ii) based on Lu's financial condition, orders him to pay partial disgorgement of $100,000, and does not impose a civil penalty. As part of his settlement, Lu has also agreed to the issuance of an administrative order that bars him from association with any broker, dealer, or investment adviser.
In related administrative proceedings, LISI and OPCO consented to the issuance of Commission Orders, without admitting or denying the findings in the Orders, except as to jurisdiction. In the LISI Order, the Commission found that from May 2003 to August 2004, LISI failed reasonably to supervise Machado with a view to preventing and detecting Machado's violations of the federal securities laws. The Commission further found that Machado frequently improperly changed and falsified trade tickets in an effort to conceal the fraudulent scheme and that, during this period, LISI did not implement reasonable procedures to prevent and detect unauthorized changes to trade tickets by its personnel. The Commission also found that if LISI had implemented reasonable procedures concerning changes to trade tickets, Machado's supervisor could have detected Machado's falsification of the trade tickets and uncovered Machado's fraudulent scheme. Accordingly, the Commission found that LISI had violated Exchange Act Section 17(a) and Rule 17a-3 thereunder because false information was entered into LISI's books and records by Machado. Accordingly, in the Order, the Commission (i) censures LISI, (ii) orders LISI to cease and desist from committing or causing violations of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder; and (iii) requires LISI to comply with certain undertakings. In determining to accept LISI's offer of settlement, the Commission considered remedial acts promptly undertaken by LISI, including full reimbursement by LISI and BLUSA of their customers' losses, totalling approximately $1.2 million, and its cooperation with the Commission's investigation.
In the OPCO Order, the Commission found that from May 2003 to August 2004, OPCO failed reasonably to supervise Lu with a view to preventing and detecting Lu's violations of the federal securities laws. The Commission found that, during this period, Lu and Machado had conducted their trading and most of their communications by e-mail on the Bloomberg Mail messaging system that was used by OPCO and that several Bloomberg e-mail exchanges between Lu and Machado presented red flags indicating that Machado was directing order flow to Lu, and in turn, Lu was providing secret gratuities to Machado. The Commission also found that because of a deficiency in OPCO's e-mail review procedures, none of Lu's Bloomberg e-mails was reviewed by OPCO staff, as required by OPCO's electronic communications policy. The Commission found that, as a result of this deficiency, for over four years, OPCO's computer system did not retrieve from Bloomberg, or load into OPCO's database for supervisory review, the Bloomberg e-mail messages for approximately 370 OPCO employees, including Lu. The Commission further found that if OPCO had monitored Lu's Bloomberg e-mail communications, OPCO supervisors could have prevented Lu's misconduct or detected it at an earlier time. Accordingly, in the Order, the Commission (i) censures OPCO; (ii) orders OPCO to pay a civil penalty of $850,000; and (iii) requires OPCO to comply with certain undertakings.