The Financial Industry Regulatory Authority (FINRA) and Nasdaq have fined Los Angeles brokerage firm, Wedbush Securities, $675,000 over its role in a client’s redemption activity and trading of exchange-traded funds (ETFs).
Wedbush’s broker-dealer customer, Scout Trading LLC, routinely submitted naked redemption orders in ETFs, according to FINRA and Nasdaq. This means that they were taking insufficiently long positions, which coupled with the short selling of funds on the secondary market, resulting in substantial and repeated failures to deliver by Wedbush.
This is not the first time Wedbush has been fined by securities regulators, and our firm has covered Wedbush’s saga in detail here, including the SEC’s $2.44 million fine in November 2014 over alleged willful violations concerning the SEC’s market access rule.
The activity at issue in this matter took place between January 2010 and March 2012, during which time Scout Trading submitted at least 255 naked redemption orders through Wedbush. The firm acted as the clearing firm for Scout in 11 ETFs, totaling more than 295 million shares being transacted.
As the clearing firm for Scout, Wedbush had a duty to learn whether the brokerage owned or had the right to redeem the necessary number of ETF shares associated with its orders. Wedbush also was accused of failing to take sufficient action over Scout Trading’s “systemic and cyclical fails to deliver,” according to FINRA and Nasdaq.
Scout Trading’s scheme started with the submission of creation orders, which were used to create new shares of the ETFs, which would go through Wedbush to close out the fails to deliver. Instead, Scout sold the ETFs on the secondary market with Wedbush’s help, leading to ill-gotten profits.
Did You Invest with Wedbush?
The attorneys at Dimond Kaplan & Rothstein, P.A. have recovered more than $100 million from banks and brokerage firms for their wrongful actions. If you invested with Wedbush Securities or dealt with Scout Trading, you may have certain legal rights that require your immediate attention. Contact us to schedule an appointment or consultation today.