First New York Securities LLC and four of its ex-traders have reached a settlement with the Financial Industry Regulatory Authority over allegations that they improperly covered short positions involving secondary offering shares, as well as engaged in associated oversight failures.
Per the FINRA settlement, First New York Securities LLC will pay $170,000 and disgorge $171,000. The former First Securities New York traders are to pay: $7,500 from Kevin Williams, $50,000 from Joseph Edelman, $30,000 from Michael Cho, and $30,000 from Larry Chachkes. By agreeing to settle with FINRA, the firm and its former brokers are not admitting to or denying the allegations.
FINRA says the trading addressed by the short selling case took place during a specific restricted period (usually five business days) when the Securities and Exchange Commission doesn’t allow for short sales to be covered with securities from secondary offerings and before the secondary offering is priced. This matter is addressed in Rule 105 of Regulation M.
The self-regulatory organization says that a 2005 probe found that the investment bank violated the rule related to five public offerings. The SRO says First New York Securities and its traders engaged in short selling during the period when they weren’t allowed to and covered short positions using shares from the offering. FINRA says that as a result, the firm and its four traders earned $171,504 and effectively got rid of their market risk.
FINRA also accuses the investment firm of neglecting to properly supervise its traders, as well as neglecting to establish proper supervisory procedures or to enforce such a system. The SRO also accuses First New York Securities of failing to maintain the proper books and records connected to the transactions that are being addressed.