The SEC took the highly unusual step of aggressively disciplining a well-known Wall Street veteran, Alfred R. Berkeley III, in today's case involving Pipeline Trading Systems.   On the other hand, such a "crowning achievement" may have been tainted by the relatively light punishment that was meted out. Pipeline, an alternative trading system, and two of its top executives - including Mr. Berkeley - agreed to settle SEC charges that, among other things, they provided false and misleading disclosures to customers of its dark pool trading platform.  [Refer to C-I discussion of the case in 10/24/11 WWW] Players in the Case.

• Fred J. Federspiel, 48, is a resident of Larchmont, NY and is Pipeline’s founder and CEO.  Prior to 3/16/10, he was Pipeline’s President.  Federspiel is a registered rep and supervisory principal at the firm.
• Alfred R. Berkeley III, 67, is a resident of Baltimore, MD and is Pipeline’s chairman.  From 12/19/03 until 3/16/10, he was Pipeline’s CEO.  Berkeley is a registered repr and supervisory principal at Pipeline Trading.  Berkeley is a former Vice Chairman and President of the NASDAQ Stock Market.

• Pipeline Trading Systems LLC, a Delaware limited liability company HQ'd in New York, is a registered broker-dealer.  Since 2004, Pipeline Trading has operated a registered ATS (alternative trading system.
• Pipeline Financial Group, a Delaware corporation HQ'd in New York, is a holding company that wholly owns Pipeline Trading and an affiliate, Milstream Strategy Group LLC.  Pipeline Financial was founded in 1999 as e-Xchange Advantage Corporation.  Pipeline Financial and Pipeline Trading have offices in New York, Boston, Chicago, San Francisco, and London. Together they currently have approximately 85 employees.

Nature of SEC's Actions. According to SEC Enforcement Director Robert Khuzami, “Pipeline and its senior executives are being held to account because they misled their customers about how Pipeline’s dark pool really worked.” More importantly, the SEC administrative proceeding marks the latest enforcement case as the SEC continues to pursue a broad and deep look into market structure issues.  Dark pools, or alternative trading systems that let investors anonymously trade larger blocks of stock without tipping their hand to a wider market, have been among the areas the SEC has been exploring for possible reforms. Further, by naming Pipeline Trading's 2 highest executives as Respondents in this case, the SEC shows it's ready to assign blame to individuals.  And not just any individuals.  The CEO and Chairman this ATS.  That is significant, especially when you include long-time veteran Al Berkeley.   Here are some related, perhaps random thoughts:

• Because Mr. Berkeley formerly ran the Nasdaq Stock Market, it's very surprising that he:  (i) committed such blatant violations - i.e., false and misleading statements;  and (ii) couldn't talk his way out of being named.

• However, the fact of the matter is that the SEC charged Pipeline Trading and its executives with more than failing to accurately disclose a significant fact and conflict of interest to its customers.  The SEC notes that Pipeline failed adequately to protect customers’ confidential trading information, allowing access to it by the research director at Pipeline’s parent company, who acted as the manager for the affiliated trading entity from 2004 to 2006.  The order does not allege that the research director sought to take advantage of the customer information.

• Finally, it would seem that the SEC was extraordinarily lenient in its sanctions - i.e., the fines could and should have been much higher.
  • First, the disclosure violations covered nearly 6 years - quite a long period.

• • Further, the affiliate was given the customer orders and went into the market to fill the orders - and perhaps reap trading profits that weren't passed along to customers.  Sort of like riskless principal trades.

• • Which brings us to another point - Pipeline represented that all users were treated the same.  Yet, it provided Milstream with certain advantages over other users, including special access to certain information about the operations of the dark pool and to data connections that made it easier for Milstream to track history and activity in the dark pool.

• • Finally, the firm did not adequately protect the confidential nature of the customers' trading information - providing it to the research director of Pipeline's parent company.

So, all in all, what seemed like a situation for congratulating the SEC on striking down at responsible individuals, it may have turned out that they were extra lenient to "favored" respondents.  A shame.  This too shall be exposed and SEC Chairman Mary Schapiro will have some explaining to do - in the Halls of Congress.