It took eight years, but the SEC finally caught up with this very lucrative, very illegal and very long-running trading scheme orchestrated by a San Diego broker-dealer, its trader and a Mexican investment adviser. The Participants. According to the SEC complaint a registered rep (not identified) with Investment Placement Group ("IPG"), a U.S. Broker-Dealer, approached the firm with a proposal from InvesTrust, a Mexican investment adviser. All InvesTrust orders would go to Aurelio Rodriguez, 42, an IPG registered rep, who would execute principal trades on behalf of IPG, with IPG acting as a counterparty to InvesTrust’s institutional clients.  Adolfo Gonzalez-Rubio, 49, IPG’s COO, directly supervised Rodriguez and the entire trading room.  Later on, in 2009, Gonzalez-Rubio became CEO of the firm - a position he still holds;  he also currently owns 26% of the firm. How the Plan Operated. It was agreed that, in exchange for placing institutional client trades through IPG and referring clients, InvesTrust would receive 70% of the markups that IPG earned from trading by InvesTrust’s institutional clients.  IPG agreed to the proposal and opened a separate proprietary trading account with its clearing firm (“IPG Proprietary Account”).  The remaining 30% of the markups earned in the IPG Proprietary Account would be split evenly among IPG and its registered rep and trader. Trading began in 2001, and through 2007, InvesTrust invested primarily in Mexican government and corporate bonds and steadily increased the size and number of institutional trades it placed through IPG. Beginning in 2008, InvesTrust invested its pension fund clients in credit-linked notes, dramatically increasing the number trades it placed through IPG.  By this time, InvesTrust had also increased its share of the markups generated from these trades to 75%, with the registered representative, IPG, and Rodriguez splitting the remaining 25% equally.

From January through November 2008, Rodriguez, acting in concert with InvesTrust, acquired ten different credit-linked notes in the IPG Proprietary Account. Rodriguez knew that the notes were slated for InvesTrust’s pension fund clients.

The SEC alleged that IPG, through Rodriguez, added a markup of roughly 1.5% to 4.5% to the purchase price, and then sold the notes to the Mexican brokerage firm. Within a day or so, IPG, through Rodriguez, repurchased the notes from the Mexican brokerage firm (at a slightly higher price), added another markup, and then sold the securities to InvesTrust’s pension fund clients. In some instances, Rodriguez repeated the buy/sell pattern with the Mexican brokerage firm multiple times, driving up the price with each successive trade, before finally selling the notes to the pension funds at artificially inflated prices.

For each transaction, InvesTrust specified in advance the trade date, the amount of securities to be bought and sold by IPG and a Mexican brokerage firm, the successively higher prices to be paid (and thus the markup to be charged on each trade), and the final price to be paid by its pension fund clients. Rodriguez received the instructions for the fraudulent transactions from InvesTrust at his San Diego, California office. From there, he confirmed the order with the Mexican brokerage firm via e-mail and then submitted the principal trade electronically to IPG’s U.S.-based clearing firm for processing.

Beginning in July 2008, the number of interpositioned trades between IPG and the Mexican brokerage firm increased as the pension funds purchased new credit-linked notes.  The interpositioning scheme added about 12% to 14% to the cost of four new notes the pension funds purchased from IPG between July and November 2008.

Interpositioning. The above transactions were all part of the ongoing interpositioning scheme, whereby an extra broker-dealer is illegally added as a principal on trades even though no real services are being provided.  The SEC alleges that Rodriguez colluded with InvesTrust and needlessly inserted a broker-dealer based in Mexico into securities transactions between IPG and InvesTrust’s pension fund clients, causing the pension funds to pay approximately $65 million more than they would have without the middleman. SEC Sanctions. Rodriguez was barred from the industry, with the right to apply for reentry after 5 years.  He was order to pay nearly $6.65 million in disgorgement and prejudgment interest.  However, all of that amount was waived, except for $1 million.  The SEC also chose to waive penalties.  Rodriguez submitted a signed affidavit that he is unable to pay for most of the the disgorgement and interest. IPG agreed to review its policies and procedures and submit a written response on how it will prevent and detect future recurrences.  It also agreed to assist the SEC with its ongoing investigations.  IPG will pay nearly $3.1 million in disgorgement, prejudgment interest and penalties. Gonzalez-Rubio, will serve a 3-month suspension for failure to supervise, but was not fined. For further details, go to:   [SEC PR 11-287, 12/23/11]   [SEC Complaint vs. Rodriquez]  and [SEC v. IPG and Gonzalez-Rubio]