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Regulatory Sanctions

Wedbush Securities Granted Unlawful Executive Privileges – NYSE Arca

November 28, 2017

by Howard Haykin


It’s not necessarily unusual to learn that a firm has granted exclusive privileges to a senior executive – let alone opted to look away from obvious violations of exchange rules or firm policies. It’s another thing for an Exchange to go after that firm and its senior executive for those very actions. Welcome to: NYSE Regulation, on behalf of NYSE ARCA (Complainant) v. Wedbush Securities Inc. and Edward W. Wedbush (Respondents).


In a 27-page complaint against Wedbush Securities and Edward Wedbush, the NYSE Regulation laid out a case on behalf of NYSE Arca that charges Wedbush Securities with having knowingly and systemically failed to oversee and supervise the trading activities of its principal, Edward Wedbush


BACKGROUNDS.    Wedbush Securities, Inc. (“WEDB”) - known as Wedbush Morgan Securities Inc. until April 2010 - is based in Los Angeles, CA, and has been registered with NYSE Arca as an Equity Trading Permit (ETP) Holder since 2004. WEDB has been registered with FINRA since 1955, and is also registered with multiple other equities and options exchanges. The firm employs over 400 registered reps and operates around 100 branch offices. 


Edward Wedbush joined the securities industry in 1955 when he co-founded Wedbush Securities. At all relevant times, including the entirety of the period during which he committed the misconduct at issue, Mr. Wedbush served as the President of WEDB and as Chairman of WEDB's parent company, Wedbush, Inc.


WEDB and Mr. Wedbush have a long history of disciplinary actions related to supervisory deficiencies. For example:

  • On 8/12/16, the SEC sustained a FINRA order that imposed a $300K fine against WEDB and a $50K fine against Mr. Wedbush for extensive and widespread supervisory deficiencies related to regulatory filings. In that order, Mr. Wedbush was suspended for 31 days from serving in any principal capacities.
  • On 12/1/15, WEDB consented to fines totaling $1.8 million in 4 related matters brought by the Exchange and other SROs concerning deficient supervisory systems and procedures governing market access and AML requirements (the "market access matters").
  • In addition to the regulatory filing matter and the market access matters. WEDB, in the 10 years preceding those matters, was fined over $2 million by regulators in more than a dozen separate actions involving supervisory failures.


EXCHANGE FINDINGS.    In addition to serving as President of WEDB and as Chairman of WEDB's parent company, Wedbush, Inc., Edward Wedbush spent several hours each day actively managing and trading in more than 70 accounts (“EW Controlled Accounts”). These accounts consisted of multiple discretionary accounts over which he had power of attorney ("POA") - including accounts for relatives, friends and WEDB employees - as well as personal and proprietary accounts for affiliates of WEDB and Wedbush, Inc. (of which Mr. Wedbush was also the majority shareholder).


Despite Mr. Wedbush's active trading in dozens of customer, personal and prop accounts, WEDB failed to implement any process to monitor or supervise Mr. Wedbush's order entry, trade executions, or trade allocations in the 70 controlled accounts, including for potential conflicts of interest and potential manipulative activity.


The absence of monitoring or supervision of his trading activities allowed Mr. Wedbush to handle the EW Controlled Accounts in an unfettered manner that was not permitted for other traders at the Firm. For example ....


►   Mr. Wedbush regularly instructed a Firm employee to enter orders under a general account, waiting until the end of the trading day to allocate executed trades among the various EW Controlled Accounts.


►   Mr. Wedbush’s post-execution allocations were determined based entirely on his own discretion.


►   The Firm had no process to ensure that allocations among the EW Controlled Accounts were not being made to steer profitable trades to preferred EW Controlled Accounts or for other improper purposes Mr. Wedbush’s orders for the EW Controlled Accounts were made and executed on a separate trading platform, not used by other WEDB traders.


►   No other Wedbush employees, besides Mr. Wedbush, were allowed to make post-execution allocations.


Indeed, the Firm’s co-Chief Compliance Officer (“co-CCO”), shortly after being hired, raised concerns about the lack of supervision of Mr. Wedbush’s trading with the Audit Committee of WEDB’s Board of Directors. The Firm, however, took no meaningful action to address the co-CCO’s compliance concerns.


The firm's abject failure to monitor or supervise Mr. Wedbush's trading in the EW Controlled Accounts continued for years. Even after senior management was alerted to it in connection with investigations by both FINRA and NYSE Regulation, WEDB and Mr. Wedbush declined to implement a supervisory system to address Mr. Wedbush's trading activities.


A key reason for the firm's failure to supervise Mr. Wedbush's trading was the respondents' refusal to devote the resources required to do so.


By abdicating responsibility to supervise Mr. Wedbush's trading activities, the firm allowed him to trade essentially unchecked, resulting in hundreds of thousands of violations of Exchange Act and NYSE Arca rules.


RELIEF REQUESTED.    The Exchange, among other things, seeks the following relief:

  • To suspend or bar Mr. Wedbush and order monetary remedies against Wedbush Securities and Mr. Wedbush. (which presumably would include restitution to aggrieved account holders); and,
  • To order that WEDB retain independent consultants to conduct a comprehensive review of the practices and supervision of Mr. Wedbush's trading activities.


[To access further details, click on NYSE ARCA Complaint, dated 10/16/17. The Statement of Facts runs from pp. 6-16.; Charges run from pp. 16-25.]