The SEC has sustained most of the disciplinary penalties imposed by the New York Stock Exchange (NYSE) on Lek Securities Corporation (LSC), a conclusion to a case dating all the way back to 2008-10.

While most of the penalties related to market manipulation were upheld, the SEC set aside some violations pertaining to short sales that LSC effected on behalf of alleged market makers, and remanded a related censure.

The NYSE was represented by FINRA, which performs certain regulatory enforcement functions on behalf of the NYSE. The SEC reviews final judgments rendered by self-regulatory organizations such as the NYSE under Exchange Act Section 19(e).

“Egregious” conduct

In 2012, the NYSE filed a Charging Memorandum against LSC, accusing it of violating NYSE rules by engaging in market manipulation that lasted from 2008 to 2010. These violations included:

• improperly cancelling market-on-close and limit-on-close orders (NYSE Rule 123C);
• effecting odd-lot limit orders in a pattern of day trading (NYSE Rules 401, 405, and 476(a)(6);
• effecting short sale transactions for customers in violation of a Commission emergency order (Exchange Act Section 12(k)(4) and NYSE Rule 401);
• executing short sales in violation of Rule 204T and 204 of Regulation SHO;
• routing orders from the exchange floor to away markets without prior approval from the exchange (NYSE Rules 70.40 and 2010);
• and failing to have adequate supervisory systems and procedures (NYSE Rule 342).

The NYSE’s Hearing Board imposed fines totaling $275,000 for the primary violations and a $500,000 fine for related supervisory issues.  An appeal was filed to the NYSE’s Board of Directors, who called the conduct “egregious,” but reduced the supervisory fine to $300,000 over concerns that it might have been duplicative.

In its appeal to the SEC, LSC disputed the bulk of the accusations, and argued that the fines were excessive. It also argued that the most of the alleged primary violations could not be the basis of supervisory violations.

Judgments mostly sustained

The SEC sustained almost all of the penalties, ruling that LSC committed the violations, that the monetary penalties were fair and consistent with previous practice, and that the NYSE applied its rules consistent with the Exchange Act.

It did, however, set aside the NYSE’s ruling that LSC violated Exchange Act Section 12(k)(4) and Rule 401 by short selling in violation of a September 2008 Emergency Order that “temporarily prohibit[ed] any person from effecting a short sale in the publicly traded securities of certain financial firms.”

That emergency order made an exception for short selling on behalf of option market makers, and the SEC determined that the NYSE did not provide an adequate explanation for why LSC was not granted an exemption for short sales conducted with those entities. The SEC also remanded a censure of LSC on that basis.