SEC Charges TD Securities with Manipulating U.S. Treasury Market through Spoofing
The Securities and Exchange Commission (SEC) recently announced charges against TD Securities (USA) LLC, a registered broker-dealer, for engaging in market manipulation in the U.S. Treasury cash securities market. The charges focus on the illicit trading practice known as spoofing, where the bank’s trader engaged in deceptive tactics to influence market prices for financial gain. Additionally, TD Securities was charged for failing to properly supervise its U.S. Treasuries trading desk head, who allegedly executed hundreds of illegal trades over 13 months.
The Spoofing Scheme and Its Impact on the Marke
Between April 2018 and May 2019, a trader at TD Securities used a spoofing strategy to manipulate the U.S. Treasury cash securities market. Spoofing involves entering large non-bona fide orders—orders that the trader had no intention of executing—on one side of the market. This tactic falsely signals demand or supply, allowing the trader to secure more favorable prices for genuine orders on the other side of the market. Once the legitimate orders were filled, generating profits for TD Securities, the trader would cancel the non-bona fide orders.
The SEC’s investigation uncovered that TD Securities’ internal controls were inadequate to detect or prevent this illegal activity. The firm also failed to take appropriate action after receiving warnings about the suspicious trading behavior. These failures directly contributed to the misconduct going unnoticed for over a year.
Inadequate Supervision and Lack of Internal Controls
The SEC’s findings pointed to systemic issues within TD Securities’ oversight framework. The head of the U.S. Treasuries trading desk, who should have been subject to closer scrutiny, was able to execute illegal trades unchecked. The firm’s failure to adequately supervise its employees created an environment where manipulative trading strategies like spoofing could thrive.
According to the SEC’s order, TD Securities did not have the necessary safeguards to monitor its trader’s actions effectively. Despite receiving multiple warnings about potentially irregular trading activities, the firm failed to take meaningful steps to investigate or halt the misconduct. This lack of supervision allowed the illicit trading to continue, undermining the integrity of the U.S. Treasury market.
The SEC’s Response to Illicit Trading Practices
“Manipulative and deceptive trading undermines the integrity of our markets,” stated Mark Cave, Associate Director in the SEC’s Division of Enforcement. The SEC has made it clear that broker-dealers and financial institutions must actively monitor their employees to prevent manipulative conduct. Firms cannot ignore warning signs or assume that suspicious activity will resolve on its own. The action against TD Securities is part of the SEC’s broader effort to combat fraudulent and deceptive trading practices in the financial markets.
The SEC’s enforcement division remains committed to identifying and punishing entities that fail to uphold the integrity of the market. This case serves as a warning to other firms that turning a blind eye to manipulative trading practices will result in significant penalties.
Penalties and Sanctions Imposed on TD Securities
In the wake of the SEC’s findings, TD Securities consented to a series of penalties. The firm was found to have violated antifraud provisions of federal securities laws and failed to reasonably supervise the trader responsible for the illicit trades. As part of the settlement, TD Securities agreed to cease and desist from future violations, was censured, and ordered to pay a significant financial penalty.
The monetary sanctions imposed on TD Securities include disgorgement of $400,000, along with prejudgment interest. The firm was also hit with a $6.5 million civil penalty. These penalties aim to discourage similar misconduct in the future and ensure that firms maintain robust compliance programs to prevent market manipulation.
Additional Legal Consequences and DOJ Involvement
In addition to the SEC’s enforcement action, TD Securities has entered into a deferred prosecution agreement with the U.S. Department of Justice (DOJ). As part of this agreement, the firm has agreed to pay over $15 million in total monetary sanctions, including the $400,000 disgorgement amount credited to the SEC. This agreement allows TD Securities to avoid criminal prosecution while committing to improving its internal controls and compliance procedures.
Furthermore, TD Securities has agreed to pay a $6 million fine to the Financial Industry Regulatory Authority (FINRA) to resolve related charges. FINRA, which oversees brokerage firms and their operations, brought its charges against TD Securities for failing to uphold regulatory standards about illicit trading activities.
The Importance of Strong Compliance Measures
The enforcement action against TD Securities underscores the critical need for financial institutions to implement and maintain strong compliance measures. Effective supervision and monitoring systems are essential to prevent illegal trading activities like spoofing. Firms must be proactive in investigating any warning signs of misconduct and take swift action to address them.
In today’s highly regulated financial markets, firms that fail to meet their compliance obligations risk not only damaging their reputation but also facing substantial financial penalties. The SEC, DOJ, and FINRA continue to prioritize the detection and prevention of manipulative trading practices, ensuring that markets remain fair and transparent for all participants.
Key Takeaways for Financial Firms
The case against TD Securities serves as a reminder for all financial institutions to reassess their internal controls and supervision practices. Firms must ensure that they have the tools and processes in place to detect and prevent manipulative trading strategies. Robust compliance programs, employee training, and timely investigations of suspicious activity are crucial in maintaining the integrity of financial markets.
By taking proactive steps to strengthen their compliance frameworks, firms can avoid the costly legal consequences that result from market manipulation. The SEC’s ongoing commitment to enforcing fair trading practices means that entities found in violation of securities laws will face severe penalties, as seen in the case of TD Securities.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.
