The Securities and Exchange Commission (SEC) has charged Rafferty Capital Markets LLC with illegally facilitating trades by letting an unnamed, unregistered firm pass trades through its system. Rafferty has agreed to pay a total of $850,000 ($637,615 in disgorged profits, the rest in pre-judgment interest and fines) and has consented to a cease and desist order, but the fund has not admitted to any wrongdoing. The SEC says that the investigation is still underway, but doesn’t explain what else it’s looking into.
Rafferty allegedly took a 15% cut for facilitating the trades
According to the SEC, five of the other company’s employees became registered representatives of Rafferty Capital but worked in their own offices with little contact and no supervision from Rafferty. It also says Rafferty had no involvement in deciding what trades to make or in how the employees would be compensated. Around 100 trades for asset-backed securities were made by the unregistered firm through Rafferty in this way, with Rafferty picking up a 15% commission.
“Rafferty Capital Markets lent out its systems to a firm that tried to sidestep the broker-dealer registration provisions,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. “These provisions require those involved in trading securities to adhere to the proper regulatory framework, and registrants like Rafferty must face the consequences if they fail to think carefully and help unregistered firms avoid the rules.”
Lack of record keeping may have gotten Rafferty into trouble
During the course of the arrangement, from May 2009 to February 2010, Rafferty didn’t preserve communications with the five employees trading on its system as you would expect it to do with its own employees, and from the SEC release it sounds like that may be what got them in trouble.
“Due in part to Rafferty’s lack of recordkeeping, one of the registered representatives was able to conceal two trades from Rafferty, which caused its books and records to be inaccurate,” the SEC wrote. It would be interesting to know if this discrepancy is what tipped the SEC off that something could be wrong, as it’s hard to see how the regulators could spot a hundred improper trades from the bulk of Rafferty’s normal activity. Presumably the investigation is continuing as the SEC looks for other, similar arrangements that it may have missed in the past.
