The SEC filed a civil injunctive action against 2 day-traders, Robert Beardsley and George Lindenberg, who allegedly perpetrated a manipulative short-selling scheme through brokerage accounts at a now defunct B/D, Redwood Trading. In the complaint, the 2 engaged in a manipulative scheme by repeatedly shorting securities in violation of the then-existing "uptick" rule, with the intent to artificially depress the prices of shares that they had sold short in order to enable them to cover their positions at favorable prices. In a related civil injunctive action, the SEC alleges that Dennis McNell, former CEO and COO of Redwood, aided and abetted their scheme and, in an unrelated fraudulent scheme, sought to hide substantial trading losses that he had incurred in a Redwood prop account.
As part of their scheme, Beardsley and Lindenberg also failed to mark their orders as short sales in order to create the false appearance that their orders were long. McNell enabled the scheme by disabling a feature of the trading software that was programmed to prevent violations of the uptick rule. The two allegedly made $2.4bn in illicit gains in less than a year. [SEC Litigation Release 20814, 11/19]
C-I Take Away. The success of the scheme was dependent, in large part, on McNell disabling a feature of the firm's trading software. This, in turn, reminds us of every firm's need to monitor any and all overrides of firm computer systems. Each system should flag each time a system feature is overridden, and by whom. A registered principal of the firm should then be responsible for investigating each of these "red flags" for potentially inappropriate activities.
Comments