SEC Charges Three Individuals and Broker-Dealer With Violating Market Structure Rules

The Securities and Exchange Commission today announced settled cease-and-desist proceedings against the CEO of a Utah-based broker-dealer and two registered persons associated with the firm for causing the firm’s violations of SEC market structure rules, and contested administrative and cease-and-desist proceeding against the firm for the alleged violations.

The proceedings involve a former proprietary trader at Wilson-Davis & Co., a Utah-based broker-dealer, the firm’s vice president/head trader, and the firm’s CEO and chairman.  Regulation SHO requires that, before a broker-dealer effects a short sale, the broker-dealer must “locate” a source of borrowable securities that can be delivered on the date that delivery is due.  The rule includes a limited exception for short sales executed in connection with bona fide market making.  From at least November 2011 to May 2013, Wilson-Davis relied on the bona-fide market making exception for all short sales by its proprietary trading group.  This reliance was improper for certain Wilson-Davis trades because much of Wilson-Davis’s proprietary trading activity was not, in fact, bona-fide market making.  While improperly availing itself of the exception, Wilson-Davis engaged in numerous short sales in over-the counter equity securities, which violated Rule 203(b)(1) of Regulation SHO and resulted in improper trading profits. 

In addition, for its proprietary trading group, Wilson-Davis failed to: have controls and supervisory procedures as required by the Market Access Rule (Exchange Act Rule 15c3-5), which requires controls and supervisory procedures reasonably designed to manage the risks of having market access; or establish, document and maintain a system for regularly reviewing the effectiveness of the risk management controls and supervisory procedures as required by Exchange Act Rule 15c3-5(e).  Wilson-Davis’s CEO violated the certification requirement of the Market Access Rule because the certification was inadequate and he signed without being familiar with the rule, not knowing who at the firm was responsible for compliance with it nor making reasonable inquiries about the firm’s annual review and the results of any such review.

This is the first time that the SEC has charged the CEO of a broker-dealer with violating the CEO certification requirement of the Market Access Rule. 

“We allege that Wilson-Davis violated SEC rules that help ensure fair markets, including the rules for short sales and for market access,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.  “Public confidence in our markets depends on careful compliance with these market structure rules.”

The SEC’s order instituting a settled cease-and-desist proceeding against Anthony Kerrigone, the former proprietary trader at Wilson-Davis, finds that Kerrigone caused Wilson-Davis’s violations of Rule 203(b)(1) of Regulation SHO.  Kerrigone consented to the order without admitting or denying the findings and agreed to cease and desist from such violations and to pay disgorgement of $486,840, prejudgment interest of $63,160.50, and a penalty of $50,000.

The SEC’s order instituting a settled administrative proceeding against Byron Barkley, the head trader, and Paul Davis, the CEO, finds that Barkley caused Wilson-Davis’s violations of Rule 203(b)(1) of Regulation SHO, Section 15(c) of the Exchange Act and Rule 15c3-5(b), (c) and (e) of the Market Access Rule, and Davis violated Exchange Act Rule 15c3-5(e)(2).  Barkley consented to the order without admitting or denying the findings and agreed to cease and desist from such violations and pay disgorgement of $67,710.20, prejudgment interest of $8,977.83, and a penalty of $50,000.  Davis consented to the order without admitting or denying the findings and agreed to cease and desist from such violations and to pay a penalty of $25,000.

In the contested administrative and cease-and-desist proceeding against Wilson-Davis, the SEC Enforcement Division alleges that the firm willfully violated Rule 203(b)(1) of Regulation SHO, Section 15(c)(3) of the Exchange Act, and Rule 15c3-5(b), (c) and (e). 

The SEC’s investigation was conducted by Jay A. Scoggins and Jeffrey E. Oraker of the Division of Enforcement’s Market Abuse Unit in the Denver Regional Office, and supervised by Robert A. Cohen of the Market Abuse Unit.  The examination that led to the investigation was conducted by Stephanie Fischer, Kenny Bossert, Lisa Byington and Denise Saxon of the Denver office.  The litigation of the administrative proceeding against Wilson-Davis will be led by Danielle R. Voorhees.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.