FINRA and major exchange companies are alleging that the broker-dealer and its CEO facilitated acts of layering, spoofing and cross-product manipulation by its client.
Lek Securities and Samuel F. Lek, CEO of the firm, are facing charges that they facilitated manipulative trading by one of its customers, dubbed “Avalon.”
The charges are being brought by the self-regulatory organization Financial Industry Regulatory Authority (FINRA) in conjunction with the New York Stock Exchange, NYSE Arca, NYSE MKT; four Bats Exchanges (Bats BZX, Bats BYX, Bats EDGA and Bats EDGX); Nasdaq and Nasdaq BX; and the International Securities Exchange (ISE).
The SRO and the exchange companies say that they have announced “commenced disciplinary proceedings” against Lek Securities and the CEO. The firm has headquarters in downtown Manhattan, a sales office in Chicago and an office in London.
“Together, the complaints allege that Lek Securities and Lek aided and abetted extensive manipulative trading in a customer account known as ‘Avalon’ from October 2010 through June 2015, which impacted both equities and options markets,” according to statement from the exchanges and FINRA. “Lek Securities is also charged with aiding and abetting Avalon’s operation of an unregistered broker-dealer.”
The charges focus on Avalon’s alleged manipulative trading activities that used practices “known as ‘layering,’ ‘spoofing’ and ‘cross-product manipulation,’ ” officials say. “Layering can involve a pattern in which multiple, non-bona fide limit orders are entered on one side of the market at various price levels to create the appearance of a change in the supply and demand of the security so that the manipulator can obtain better-priced executions on orders entered on the opposite side of the market; the non-bona fide orders are then cancelled.”
The term “spoofing” refers to a form of manipulation caused by entering non-bona fide orders with the “intention of cancelling those orders once they trigger some type of market movement or response from other market participants from which the manipulator can profit,” according to the statement. “The complaints allege that Avalon also engaged in cross-product manipulation by engaging in the manipulation of option prices through trading in the underlying equity securities.”
Lek Securities is also charged with failing to comply with the SEC’s Market Access rule (SEC Rule 15c3-5) because it allegedly “failed to have adequate risk-management controls and supervision over Avalon (its direct market access client).” The CEO Lek is charged with causing the violations, officials add.
The firm is also charged with violating Know Your Customer (KYC) rules, and rules regarding the preservation and supervision of electronic communications, the maintenance of CRD information, supervision of employee outside business activities, payments to individuals not associated with a broker-dealer, and failing “to fully and timely comply with information requests from FINRA in connection with the investigation,” officials add.
The disciplinary complaint is the start of a formal proceeding by FINRA “Under FINRA and exchange rules, a firm or individual named in a complaint can file a response and request a hearing before a disciplinary panel. Possible remedies include a fine, censure, suspension or bar from the securities industry, disgorgement of gains associated with the violations and payment of restitution,” according to the statement from the SRO and the exchanges.
In response to the allegations, the CEO of Lek Securities says the case is without merit.
“Lek Securities is aware of the complaint and we are in the process of reviewing the allegations,” CEO Lek tells FTF News. “We believe that the charges are without merit. Lek Securities has rigorous anti-manipulation controls in place, designed to prevent any improper trade from reaching the market and our controls functioned properly.”
Need a Reprint?