Last week, Scottrade Inc. became the latest entity to admit wrongdoing in connection with settling SEC charges. In a January 29, 2014 administrative order, the brokerage firm not only agreed to a $2.5 million penalty, but also admitted that it violated federal securities laws when it failed to provide the SEC with complete and accurate "blue sheet" trading data. This settlement marks the fourth such admission since the Commission's June 2013 modification to its "no admit/no deny" settlement policy.
Most of the time a party is not required to admit wrong doing to reach a settlement and, until recently, the SEC supported this policy because they believed it helped to facilitate settlements. Yet in June 2013 the SEC announced that they would reverse this policy and would require public admissions of wrong doing in certain cases. Examples include cases of "egregious" fraud, intentional misconduct, those that involve significant investor impact, or those that are otherwise highly visible.
The charges against Scottrade pertained to "blue sheets", which are standardized documents, generated at the Commission's request, that provide information to the Commission about trades performed by a company or its customers. In March of 2006, Scottrade changed the coding that generated the blue sheets and eventually led to certain trades being left unreported to the SEC. The SEC noticed that there was incomplete trading data and notified Scottrade and only then was this error discovered. There were over 1,000 occasions when the data reported to the SEC was incorrect.
In settling the charges, Scottrade not only admitted that its compliance practices were "inadequate," but also admitted that it "willfully violated" Section 17(a) of the Exchange Act by failing to provide the SEC with correct blue sheet data and to properly maintain and preserve that data. In addition to admitting wrongdoing, the firm agreed to a $2.5 million penalty and an injunction. It also agreed to hire an independent consultant to review its record-keeping policies and procedures.
However, this settlement does not do much in the way of instructing the public and practitioners in the industry of the new policy. There was no intentional misconduct or fraud alleged but the SEC still saw the 6 year gap as egregious. The impact on investors is unknown but could be significant.
SEC Chair Mary Jo White said in a speech last week that we can expect to see more SEC settlements involving admissions in the coming months.
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