An important part of the implementation of any compliance program is the supervision of the firm’s employees and associated persons. A firm’s compliance manual should address policies and procedures that have been developed and are maintained to prevent, detect, and respond to securities law violations of associated persons working for them.
Recently, the SEC Instituted a Public Administrative Proceeding for Failure to Supervise against Wedbush Securities Inc. The SEC alleges that the firm failed to supervise Timary Delorme, a registered representative associated with Wedbush Securities Inc., who engaged in manipulative trading activity over multiple years.
In late 2009, Delorme’s front-line supervisor at Wedbush conducted a review of the trading and customer portfolios for each representative he supervised. During the review, he noted concerning trading activity related to penny stocks. Based on his concerns, the supervisor took steps to restrict Delorme’s trading activity by limiting her trading in the last hour of the day and restricting all customer trading in certain penny stock securities. Due to Delorme’s tenure with Wedbush, and the fact that her business partner was a partial owner of the firm, the supervisor felt he had to “be gentle” in terms of restricting Delorme’s activity.
In November of 2012, during email supervision reviews, Delorme’s front-line supervisor reviewed an email from Delorme to a customer, who was involved in a penny stock scheme with Izak Zirk Engelbrecht a/k/a Zirk De Maison (“Engelbrecht”) – In 2014, Engelbrecht was charged by the SEC for violating the anti-fraud and registration provisions of the federal securities law. The email detailed practices that the customer and Engelbrecht were using to engage in price manipulation of penny stocks. Many of the penny stocks being manipulated were held in Wedbush accounts owned by Delorme and her customers. Additionally, the email to the customer detailed that one of the penny stock deals had to be executed through another broker-dealer because Delorme was restricted from any purchases through Wedbush during the last hour of trading. The email was escalated internally up to the president of Wedbush as well as the compliance and legal departments.
Also around the time of the customer email, Delorme and Wedbush were named as respondents in two FINRA arbitration claims submitted by customers of Delorme. The complaint alleged that Delorme solicited their investments in certain penny stock issuers, guaranteed no losses, gifted securities, and set up a deal between her customers and an associate of Engelbrecht’s. Furthermore, the customers provided text messages to substantiate allegations that Delorme was involved in manipulating the securities in their accounts in order to guarantee them profits. The two FINRA arbitration claims were settled in 2013. Wedbush deemed Delorme culpable based on her actions and determined she was responsible for paying for half of the settlements in each arbitration. She was also placed on heighted supervision for one year.
In November of 2012, Wedbush received inquiries from FINRA’s Office and Fraud Detection and Market Intelligence into trading in a specific penny stock by three accounts held at Wedbush by Delorme and her husband. In December of 2012, Wedbush received a second FINRA inquiry regarding Delorme and the allegations in the customer arbitrations. Delorme drafted her own responses to FINRA and sent them to the Wedbush compliance department to review. The compliance department did not initiate any steps to validate accuracy of Delorme’s responses. In April 2013, FINRA interviewed Delorme. Delorme’s front-line supervisor and Wedbush compliance personnel attended the interview. After the interview, Wedbush neglected to follow-up on the responses that Delorme had provided to FINRA, even though certain responses provided to FINRA were inconsistent with the customer email that Delorme’s supervisor had escalated to the president of Wedbush, and the legal, and the compliance departments. FINRA Resolved the inquiry by sending a letter of caution finding Delorme Delorme to be deficient in failing to comply with Wedbush’s policies and procedures regarding Regulation S-P.
Additionally, in April of 2014, the FBI contacted Delorme and she was interviewed regarding her role in Engelbrecht’s penny stock scheme. Delorme contacted her front-line Supervisor. She and her Supervisor spoke to the FBI regarding their knowledge of the penny stock scheme.
At multiple times in the process, Wedbush missed opportunities to enact procedures that would have detected the issues related to Delorme’s trading practices. Once the issues were detected, clear guidelines should have been established for their compliance and supervisory personnel to follow for reporting and investigating these types of issues. The established policies and procedures would have alleviated the front-line supervisor from considering office politics before considering the appropriate restrictions and discipline for Delorme. At the time, the firm would internally escalate the issues and consult legal and compliance as necessary.
It is important that a firm’s compliance manual contain policies and procedures that are developed and updated as needed to prevent, detect, and respond to securities law violations. Please contact Red Oak if you need any assistance with your compliance policies and procedures.
