Last week, SDNY Judge Jesse Furman issued a 51 page decision in In Re: Barclays Liquidity Cross and High Frequency Trading Litigation dismissing all of the cases consolidated under the MDL. In these cases, investor plaintiffs asserted federal securities law claims under Section 10(b) and 6(b) of the Exchange Act against seven stock exchanges, Barclays PLC, and Barclays Capital Inc., as well as California state law claims against Barclays, based on their contention that defendants’ practices permitted high frequency traders (“HFTs”) to obtain unfair trading advantages over other investors. Judge Furman dismissed all the claims because the allegations were insufficient to state a claim as a matter of law.
SEC Sanctions Dark Pool Operator and Affiliated High Frequency Trader
In the latest round of regulatory action involving high frequency trading and dark pools, the SEC announced yesterday that it reached a settlement with ITG, Inc., and its affiliate Alternet Securities, Inc., imposing a $20.3 million sanction based on ITG’s misuse of confidential order information to benefit the firm’s proprietary high-frequency trading.
SEC Finds Metadata Contradicts CCO’s Statement In Examination
The SEC recently settled an enforcement action against an investment advisor, Parallax Investments LLC, its owner and its Chief Compliance Officer, finding that metadata in the CCO’s annual compliance memorandum contradicted the CCO’s statement to the SEC staff about his compliance review.
SEC Flexes Its Enforcement Muscle For Securities-Based Swaps
The broad definition of a “swap” in the Dodd-Frank Act, read literally, would encompass many transactions that Congress never intended to cover, so the SEC and the CFTC have jointly promulgated regulations that provide that many of those transactions are not treated as swaps. However, a recent SEC Investor Alert, stating that fantasy stock trading games may be considered swaps if they award prizes, suggests a more expansive reading of the definition by the regulators.
Regulators Fail To Identify Cause Of Abnormal US Treasury Trading on October 15, 2014
Yesterday, the U.S. Department of Treasury, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, the SEC and the CFTC issued a Joint Staff Report analyzing the significant volatility in the U.S. Treasury market on October 15, 2014. The analysis, however, “did not reveal a clear, single cause of the price movement.”
SEC Sanctions Hedge Fund Advisory Firm For Improper Valuations of Illiquid Securities
Returning to an enforcement priority repeatedly articulated over the years (for example, here, here and here), the SEC recently imposed sanctions on a registered investment advisory firm and two principals arising out of an alleged scheme to inflate the valuations of illiquid mortgage-backed securities held by private investment funds managed by the adviser. The SEC charged that the overvaluations improperly increased the management and performance fees collected by the adviser.
In AlphaBridge Capital Management, LLC, the Order reflecting the parties’ agreement to an aggregate penalty of $5 million, alleged that the firm systematically overstated the value of securities known as interest-only and inverse interest-only floaters. These unlisted, thinly-traded securities are tranches of collateralized mortgage obligations which receive a coupon payment that fluctuates as interest rates change. In the absence of a robust market, these securities are typically valued based on discounted cash flows. The computation of future cash flows and the resulting valuations are heavily dependent on a projection of the percentage of the underlying mortgages that are expected to be prepaid at any given time.
SEC’s Data-Driven Analysis Identifies Allegedly Improper Trade Allocations by Investment Advisor
Relying on a data-driven statistical analysis conducted by the Division of Economic and Risk Analysis (DERA), the SEC recently commenced administrative proceedings against an investment advisor, Welhouse & Associates, Inc., and its principal, charging them with improperly allocating profitable options trades to the principal’s own accounts while allocating unprofitable trades to the firm’s clients. The SEC’s announcement states that it is the first enforcement proceeding arising from the Commission’s recent initiative to use statistical analyses “to identify potentially fraudulent trade allocations known as ‘cherry-picking.’”
The Order initiating proceedings states that DERA analyzed the firm’s allocation of options trades over 35 months, from February 2010 to January 2013. During this time, the SEC alleges that options trades were typically executed through a master account at the firm’s broker, and allocated later in the day to either the principal’s accounts or client accounts.
UK Regulators Address Manipulation of Trading Benchmarks and Other Misconduct
Concluding a year-long review, UK regulators issued the final report of the Fair and Effective Markets Review Committee last week, making a number of recommendations intended to restore confidence in the trading markets for fixed income, currency and commodities (“FICC”) in the wake of past misconduct.
The report noted the substantial fines that have been levied in recent years in connection with the attempted manipulation of LIBOR, foreign currency and other trading benchmarks and market prices, misrepresentations to investors and collusion. Indeed, since 2012 authorities in multiple jurisdictions have imposed criminal and regulatory penalties aggregating more than $10 billion related to this conduct. In June 2014, the Chancellor of the Exchequer, together with the Governor of the Bank of England, launched the Review to recommend changes in regulatory policies in the relevant markets.