Celadon Financial Group
The findings stated that when the third-party vendor the firm retained to prepare its quarterly Rule 606 reports could not accurately process the firm’s trade data, the firm provided the vendor with historical trade data for the fourth quarter of the prior year and the first and second quarters of the current year. The firm published the Rule 606 report without correcting the errors the vendor experienced processing the firm’s trade data. As a result, this Rule 606 report provided customers inaccurate information regarding its routing of non-directed orders in NMS securities.
The findings also stated that the firm and the CCO failed to establish and maintain a supervisory system, including WSPs, reasonably designed to achieve compliance with Rule 606. The WSPs required Waldman to review quarterly reports for accuracy before the vendor published them, but did not provide guidance on how the review should be conducted, what the review should include, how to identify inaccuracies in the reports, or what to do if the report was not accurate.
When conducting his supervisory review of Rule 606 reports, the CCO randomly selected five trades for comparing the terms of the trades to the execution venue, payment for order flow and material aspects disclosures in the quarterly report. the CCO’s random review of five trades per quarter was not reasonably designed to supervise the accuracy and completeness of the firm’s disclosures, given that the firm effected approximately 10,000 transactions in NMS stocks each month.
The CCO also approved the firm’s quarterly reports for publication even though he knew the reports were prepared using historical trade data. The firm later revised its supervisory systems and WSPs.
The findings also included that the firm failed to develop and implement a reasonably designed anti-money laundering (AML) program. The firm expanded its business to facilitate the liquidation of low-priced securities and became aware of numerous red flags related to a group of approximately 10 customers who wished to deposit and sell low-priced securities and often transacted in the same low-priced securities.
Specifically, when the firm onboarded the customers, it became aware that several of the customers were the subject of news reports indicating possible criminal, civil, and regulatory violations. The firm executed over 3,600 transactions in low-priced securities for the customers for a total principal amount of approximately $299 million, constituting over 74 percent of the total dollar amount transacted in low-priced securities at the firm and generating approximately $7.9 million in commissions.
Furthermore, the firm’s failure to implement an AML program reasonably tailored to its business resulted in it failing to identify, investigate, and report suspicious trading by the customers.
