FINRA and NASDAQ jointly censured and fined Wedbush Securities, Inc. $675,000 for supervisory failures related to redemption and trading of leveraged exchange-traded funds ("ETFs"), which preceded chronic failures to deliver multiple ETFs for over two years.
According to the report, Wedbush, in its capacity as clearing firm for broker-dealer Scout Trading, LLC, failed to determine whether Scout Trading owned or had the legal right to tender/redeem ETF shares which Scout Trading had placed in over 255 naked redemption orders in 11 ETFs over a two-year period, and involving a total of over 295 million shares. The investigation states that Scout Trading routinely submitted naked redemption orders and engaged in open market short selling contrary to Wedbush's obligations as an Authorized Participant of the relevant ETFs and SEC Regulation SHO, and that Wedbush was aware or should have been aware of this illicit activity.
The findings state Wedbush's supervisory failures and a failure to detect Scout Trading's naked redemption and short sale misconduct allowed for "chronic" fails to deliver in several ETFs for the two-plus year period. FINRA Short Sale staff reviewed 14 ETFs that traded under the symbols EDC, EDZ, ERX, ERY, FAS, FAZ, SDS, SSO, TMF, TMV, TNA, TZA, ZSL, and AGQ.
In describing Wedbush's misconduct, FINRA Head of Market Regulation Thomas Gira said, "Naked trading strategies that result in a pattern of systemic and recurring fails flout [the timely delivery of securities requirement] and do not comply with Regulation SHO." NASDAQ added that firms such as Wedbush "play vital roles in ensuring they carry out their obligations consistent with applicable securities laws and do not become a vehicle for misconduct."
However, FINRA and NASDAQ determined Wedbush did become such a vehicle, fining Scout Trading $3 million in a separate disciplinary action and ordering Wedbush to pay a $675k fine and to revise written supervisory procedures.
If you have invested with Wedbush Securities, Scout Trading or with any broker, financial adviser or firm whose over-reliance on selling short or violation of the short sale-oriented Regulation SHO has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.
News Release: FINRA and Nasdaq Fine Wedbush Securities Inc. $675,000 For Supervisory Violations Relating to Chronic Fails to Deliver by a Client in Multiple Exchange-Traded Funds (FINRA)