Wedbush Securities Inc., a broker-dealer, and Timary Delorme, a registered representative with the firm since 1981, were named in separate administrative proceedings initiated by the Securities and Exchange Commission for their role in an alleged pump and dump scheme aimed at retail investors from 2008 to 2014. Simultaneously, Ms. Delorme settled her SEC action by agreeing to pay a fine of US $50,000 and to never associate with a broker-dealer, among other sanctions.

According to the SEC, Ms. Delorme benefited from investing her customers in microcap securities that were subject to a pump and dump scheme by Izak Zirk Engelbrecht (a/k/a Zirk de Maison) – who last year was sentenced to 12 years’ imprisonment for his role in the fraud that resulted in a US $39 million loss to customers. (Click here for a copy of the Department of Justice’s press release regarding Mr. Engelbrecht’s sentencing.) The SEC also previously brought charges against Mr. Engelbrecht and others related to the alleged manipulative scheme. (Click here for a copy of the SEC’s complaint.)

According to the SEC, in late 2012 and early 2013, Ms. Delorme’s supervisors became aware of numerous red flags regarding her conduct, including by reviewing email that purportedly outlined her role in fraudulent transactions involving penny stocks; receiving copies of two customer arbitrations with the Financial Industry Regulatory Authority filed by her customers that made “serious allegations” regarding her role in the same penny stock issuers; and becoming aware of FINRA’s investigations regarding her personal trading of one of the relevant penny stocks as well as of the allegations underlying the customer arbitrations. However, said the SEC, despite being aware of these red flags, Ms. Delorme’s supervisors continued to permit her to make investment recommendations to her customers.

The SEC charged that Wedbush failed to have adequate supervisory systems to guide supervisors and staff to detect the facilitation of market manipulation by registered representatives, such as Ms. Delorme, or to investigate and handle red flags. As a result, claimed the SEC, “[t]here was substantial confusion as to whose responsibility it [was] to conduct investigations related to red flags of potential market manipulation by [Ms.] Delorme.”

In explaining Ms. Delorme’s seemingly modest settlement amount, the SEC noted that Ms. Delorme had provided the SEC with a sworn statement of financial condition, asserting her inability to pay a civil penalty. The SEC said it took this statement into account in determining the US $50,000 penalty.

In 2014, Wedbush and two senior officers resolved an enforcement action by the SEC alleging violations of the Commission’s market access rule (Reg MAR; click here for background). Wedbush agreed to pay a fine of US $2.44 million, while the two individual officers agreed to pay a combined fine of US $85,000. Wedbush also agreed to retain a consultant to review its compliance with regulatory requirements related to its market access business, among other matters. (Clickhere for background in the article “Broker-Dealer and Two Senior Officers Fined US $2.5 Million for Market Access Violations” in the November 23, 2014 edition of Bridging the Week.) More recently, Wedbush agreed to pay a fine of US $1 million and US $250,000 in disgorgement to resolve SEC allegations that it violated the Commission’s customer protection rule (click here for background on this rule, and here regarding the SEC’s charges) between September 2014 and January 2015 and a fine of US $1.5 million to the Financial Industry Regulatory Authority related generally to the same offense. (Click here for background in the article “US Broker-Dealer Agrees to US $1.5 Million Fine to Resolve FINRA Charges Related to Capital and Customer Protection” in the February 11, 2016 edition of Bridging the Week.)