BrokeAndBroker: SEC slams OPCO (gifts/emails)
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SEC Sanctions OPCO: Gifts, Gratuities, and Bloomberg Emails
Written: February 25, 2009
By Bill Singer
Without admitting or denying the findings, Respondent Oppenheimer & Co., Inc. (OPCO) submitted an Offer of Settlement to the Securities and Exchange Commission. In the Matter of Oppenheimer & Co., Inc. ( Securities Exchange Act. Release No. 59438, Admin. Proced. File No. 3-13378 / February 24, 2009) http://sec.gov/litigation/admin/2009/34-59438.pdf
You Scratch My Back ...
#ffff00">Frank Lu (Lu) was a former OPCO salesperson specialized in emerging market securities and was compensated solely on a percentage of the revenue generated by his customers' orders.
#ffff00">Victor P. Machado was a former Leumi Investment Services Inc and Bank Leumi USA (Leumi) trader.
In mid-2003 Lu and Machado secretly entered into a scheme whereby in consideration for gratuities and entertainment paid for by Lu, #ffff00">Machado directed order flow to OPCO for execution at prices favorable to that firm but detrimental to Leumi's customers. Machado often #ffff00">altered Lu's quoted prices in favor of OPCO or to the detriment of Leumi. For example, if Leumi entered a buy for which Lu quoted $99.50, Machado paid $100. The two conspirators also#ffff00"> interpositioned OPCO between Leumi and other broker-dealers, resulting in less favorable executions for Leumi than the prevailing market. This arrangement resulted in a 450% increase in Machado's trades with OPCO, to the detriment of Leumi and its customers in the amount of about $1.1 million. This scheme resulted in more order flow for Machado and higher compensation to Lu. During 2003 and 2004, Lu entertained Machado numerous times at a typical cost of a thousand dollars; and six times per year Machado was given gifts (nothing was reported as gratuities or entertainment as their employers' required).
FINRA Rule 3060 (which was in effect during the relevant period) #ffff00">prohibits a person associated with a broker-dealer from directly or indirectly giving anything of value, including gratuities, in excess of one hundred dollars per individual per year to any person where such payment or gratuity is in relation to the business of the employer of the recipient of the payment or gratuity. The rule also requires that the broker-dealer retain a record of all payments or gratuities in any amount known to it.
The above arrangement constituted a violation by Lu of Section 17(a) of the '33 Act and Section 10(b) of the '34 Act (and Rule 10b-5 thereunder). Lu also aided and abetted Machado's violations of Section 10(b) of the '34 Act (and Rule 10b-5 thereunder).
From May 2003 to August 2004 (the “relevant period”), at the end of each workday, OPCO’s computer system was to obtain from the Bloomberg Mail messaging system, all e-mail for each OPCO employee who had a Bloomberg account and used that e-mail system. After identifying those e-mails, OPCO’s computer system was programmed to download the e-mail into a database for supervisory review but OPCO failed to implement reasonable procedures for identifying which OPCO employees had Bloomberg accounts, and programming that information into its computer system. As a result, for more than four years, #ffff00">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).
During the relevant period, Lu and Machado conducted their trading and most of their communications over the Bloomberg messaging system. Several Bloomberg e-mail exchanges between Lu and Machado presented red flags indicating that Machado was directing order flow to Lu, and in exchange, Lu was providing secret gratuities to Machado.
If OPCO had properly monitored Lu’s Bloomberg e-mail communications, OPCO likely would have prevented Lu’s misconduct or detected it at an earlier time.
Given that Lu received most of his order flow from Leumi and that the amount of business that Lu received from Leumi had increased dramatically during the period that these e-mails were being sent, the messages likely would have alerted Lu’s supervisor to the improper dealings between Lu and Machado.
OPCO’s failure to review any of Lu’s Bloomberg messages for an extended period constituted a failure to implement reasonable procedures for preventing or detecting Lu’s fraudulent conduct.
The Commission settled the matter on the basis of a Censure; $850,000 civil penalty; and and undertaking by OPCO to review relevant policies, procedures, and systems regarding the capture/review of e-communications by its employees. Within 90-days of the issuance of the Order, OPCO shall submit a report describing the review, conclusions, and changes, and shall certify its procedures and systems for application of same.
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