SEC Charges Brokerage Firm with Short Sale Violations and Failing to Report Suspicious Transactions
July 27, 2020
File No. 3-19893
July 27, 2020 - The Securities and Exchange Commission today announced settled charges against Celadon Financial Group, LLC, a registered broker-dealer based in New Jersey, for violating the federal securities laws governing the execution of short sales and the submission of Suspicious Activity Reports (SARs).
The SEC's order finds that, from at least July 2016 through December 2017, certain broker-dealer customers of Celadon routinely used their accounts held at Celadon to liquidate large volumes of shares in thinly-traded, low-priced, over-the-counter stocks held by their own customers. According to the order, Celadon facilitated its broker-dealer customers' sales into the market by executing short sales throughout the day in a principal capacity. Celadon covered its short positions at the end of the day by buying the same number of shares from the broker-dealer customers at a lower price, also on a principal basis. During this period, the order finds, the trading gains that Celadon generated based on the price differences between the short sales to the market and the shares purchased from its broker-dealer customers accounted for almost one-third of the firm's revenue. The order further finds that, for at least ten thousand of these short sales, Celadon failed to locate shares of those stocks that it could borrow, as is required by the federal securities laws.
According to the SEC's order, Celadon also failed to adequately implement its policies and procedures to reasonably address the risks associated with this business. As a result, the order finds, Celadon failed to file SARs for numerous transactions that the firm had reason to suspect involved fraudulent activity or had no business or apparent lawful purpose.
The SEC's order charges Celadon with violating the short-selling provisions of Rule 203(b)(1) of Regulation SHO under the Securities Exchange Act of 1934, and the SAR-filing provisions of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder. Without admitting or denying the SEC's findings, Celadon agreed to be censured, to cease-and-desist from committing or causing violations or future violations of those provisions, and to pay a $125,000 civil penalty.
The SEC's investigation was conducted by Peter Pizzani, Daphne Downes, and Thomas P. Smith, Jr. of the SEC's New York Regional Office and was supervised by Sanjay Wadhwa. The SEC's examination that led to the investigation was conducted by Hermann Vargas, Michael Fioribello, and Steven Vitulano of the New York Regional Office.