Unregistered B/D Accused of Defrauding Day Traders Out of $3.6M [Updated]

The SEC put a stop to an interesting scheme:  an unregistered broker-dealer houses day traders who trade the firm's accounts at registered broker-dealers.  Apart from the alleged fraud committed against the day traders, this case has interesting implications, like KYC at the registered B/D's.

Facts and Circumstances.   The SEC obtained an emergency court order against Tuco Trading, an unregistered La Jolla, CA, B/D, and its principal, Douglas Frederick.  They allegedly defrauded day traders out of 35% of their equity, or $3.62 million, using the traders' money to cover other traders' losses or to pay firm expenses. 

Tuco Trading provided securities day-trading capabilities to more than 250 traders who had approximately $10.2 million invested.  Each traded in Tuco's own brokerage accounts at registered broker-dealers - each being assigned to a sub-account.  Traders were allowed to day-trade without meeting the $25,000 minimum equity requirement under NASD regulations.  They also were allowed to use up to $20 of Tuco's equity for each $1 in their trading sub=account - NASD and NYSE regulations only allow a day-trader to have 4:1 buying power.  Tuco received transaction-based compensation for its members' trading and Tuco's traders conducted substantial day=trading, both in terms of dollars and numbers of transactions. 

C-I Take Away.  Aside from what the SEC disclosed in its PR and Litigation Release, how about providing us with some information about the registered broker-dealers that held accounts for Tuco Trading and/or Douglas Frederick, like ...

• What role, if any, did these registered B/D's play in this scheme (i.e., might they have been on "the take"?
• What sort of "know your customer" due diligence did the B/D's conduct?
• What red flags popped up in response to the enormous trade volume that flowed through their firms. and how did they respond?

C-I will follow-up for additional information.  [SEC PR 08-36; Litigation Rel. 20480, 3/6]

Comments

[tucotrader]

I'm a Tuco trader. You need to get your facts straight before you start using the terms defrauding as at this point that type of language is straight libelous. I haven't been defrauded, I withrdrew quite a sizable amount just last week as did most of my other trading partners. And will continue to do so as long as we don't get shut down by these pawns at the SEC.

The SEC didn't bother to ask Tuco about it's multiple accounts (which can and do offset each other) and they are not accounting for all the money correctly with their allegations. Tuco is a standup firm with plenty of capital I know Doug and the partners personally and I have a private agreement with them not as a customer but as a class B memeber of the firm. The "money defrauding" allegations are not what this is about. This is about Tuco being bullied for not being a "licenesed" broker dealer and profitting from commissions and assigning leverage which only "registered" broker-dealers can do. Ehem! Very clear example of government "regulation" trying to "protect investors", but which also inadvertantly elimantes competition... hm, I wonder why?!! The only thing being defrauded here is capitalism and private independent traders being able to compete with Ibanks, MM firms, and hedge funds. Traders aren't investors who need protecting, we're smart capitalists and the PRIVATE agreement we entered into under a PRIVATE LLC is no business of the governemnt! Tuco does not represent itself and has never represented itself as a broker, PERIOD!

There was no scheme regarding B/D's. Tuco has a legal non-B/D private acct with Penson... which BTW, the SEC forced to freeze which is direct violation of a court order to allow Tuco to continue doing business for at least two weeks until a hearing could be set. I can't trade my account today because of it and Tuco is being forced to have their lawyers prove to Penson that there actually is a court order allowing us to stay in business. BULLIES!!!! All in all this is bullshit, and I'm pissed that the SEC feels it needs and has the right to protect myself from myself and will violate court orders to do so. BULLSHIT!!!!

So don't take everything you read from the SEC at face value. GS has got those barney's in their right pocket. Their press release was exactly that... PR!!! Quit being a pawn for the SEC and sensationalizing their PR for them. Do your homework first!

tucotrader

[Howard Haykin - C-I Managing Member]

I respectfully acknowledge the comments of the Tuco Trader and look forward to posting updated information as this case progresses. I have also updated the blog by adding the terms, "accused of" and "alleged" in the heading and body of the text. Tuco Trader is accurate in noting that the story we wrote was based solely on the report issued by the SEC. Compliance Insights did not seek out other viewpoints on this story.

[sdnewsman]

Tuco Trader,

I'm a reporter with the local NBC station in San Diego. Would you like a chance to defend Tuco Trading? Are you in the San Diego area? If you or any other traders would like to do this please let me know.

SD Newsman