Traders lost money under Gunn, no shots fired

Discussion in 'Wall St. News' started by stock777, May 16, 2008.

  1. By Frank Schloegel
    May 15, 2008

    FINRA has fined GunnAllen Financial $750,000 for its role in a trade allocation scheme conducted by the firm's former head trader, Alexis Rivera. The fine is also for various violations of anti-money laundering, reporting, record-keeping and supervisory rules, at the Tampa-based firm.

    According to the regulator, Rivera engaged in a scheme to steal profits from GunnAllen clients and put them into the trading account of his wife. He used information he attained in his role as an investment banker to discover trades that could turn a quick profit. Then he put over $270,000 from those trades into his wife’s account from January 2002 to December 2003.

    FINRA claims that could have been avoided if GunnAllen had appropriate supervisory procedures in place.

    In October 2003, for instance, Rivera received an order to short sell 10,000 shares of Linear Technology Corporation common stock for a GunnAllen client. He knew the order was coming from a day trader that would close the deal at the end of the day. So Rivera quickly covered the short for a profit of $650 which he sent to his wife’s account, then later in the day he bought and resold the position resulting in a loss to the client of $8,500.

    During the 2 years that Rivera orchestrated the scheme, he made 446 buy and 446 sell transactions in his wife’s account, most of which followed the same pattern of preying on day traders. More than 90% of Rivera’s deals turned a profit, according to FINRA.

    As a result of Rivera’s actions, GunnAllen did not get the best price for its clients, leading to unknown losses for hundreds of them, according to FINRA.

    FINRA has suspended Rivera’s supervisor, Kelley McMahon, for six months from association with any FINRA-registered firm and fined him $25,000, jointly and severally with the firm. McMahon was the manager of the Trading Desk and Rivera’s immediate supervisor. McMahon should have raised a red flag when Rivera was trading in his wife’s account, especially with the “extraordinary percentage of profitable trades in the account,” according to the FINRA settlement.

    FINRA claims that GunnAllen controls were deficient in several areas and that Rivera’s got away with his scheme too easily.

    Investigation into Rivera’s actions revealed that before March 2005, GunnAllen had never put any stock on a restricted or watch list, “notwithstanding the need to do so because of investment banking business being conducted by the firm,” according to FINRA.

    GunnAllen also lacked a supervisory system designed to ensure that mark-ups and commissions on equity securities transactions were fair and reasonable. The firm gave its brokers significant discretion in setting commissions, and had no system to determine the reasonableness of charges and commissions. FINRA also discovered that GunnAllen had inadequate controls to discover excessive trading or churning with respect to small accounts, as Rivera had done.

    The settlement also listed several failures of management and control that were only peripherally related to Rivera’s conduct.

    The firm failed to preserve emails from a switch in service providers, failed to properly amend or file forms U4 and U5, failed to implement an anti-money laundering compliance program and failed to report a business relationship with a barred individual.

    Overall, FINRA contends that GunnAllen acted in a way that gave traders too much freedom and not enough oversight.

    Without admitting or denying any of the findings, GunnAllen and McMahon have agreed to pay their fines.