Pipeline Trading Systems LLC & two top executives agreed to pay penalties to settle S.E.C. charges that they provided false and misleading disclosures to its "dark pool" trading platform customers.   The Respondents - which included founder and CEO Fred Federspiel and Chairman and former CEO Alfred R. Berkeley III - also failed adequately to protect customers’ confidential trading information.   [See related story focusing on Mr. Berkeley, in today's Behind the News section]

SEC Alleged Findings. With regard to disclosures, the 3 Respondents supposedly described Pipeline's dark pool trading platform as a "crossing network" that matched up customers' orders.  In fact, the vast majority of orders were filled by a trading operation affiliated with Pipeline.

The SEC notes that an affiliate - Milstream Strategy Group LLC - filled the vast majority of customer orders on Pipeline’s system.  Milstream further actually tried to predict the trading intentions of Pipeline's customers, and then traded elsewhere in the same direction as customers before filling the majority of their orders on Pipeline's trading platform.  In doing so, the SEC said Pipeline's claims were "false and misleading" and not providing the "natural liquidity" being advertised.  Milstream and Pipeline are owned by the same parent company.

Pipeline took certain steps to address the conflict of interest it created, including by paying the affiliate’s traders using a formula that rewarded them in part for giving favorable prices to Pipeline’s customers.  The SEC’s order found that Pipeline failed to disclose the compensation formula or Milstream’s activities to its customers or in its filings to the SEC. Finally, the SEC also found 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.

SEC Disciplinary Sanctions. Pipeline Trading will pay a $1mn penalty; Pipeline's founder and CEO Fred Federspiel will pay a $100K fine;   Pipeline Chairman and former CEO Alfred R. Berkeley III also will pa y a $100K fine.

The administrative proceeding against Pipeline by the S.E.C. marks the latest enforcement case as the agency pursues 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. Pipeline was not immediately available for comment.   For additional information, see:  [SEC Administrative Proceedings 3-14600]   and  [SEC PR 11-220, 10/24/11]