Canada’s second-largest bank, Toronto Dominion Bank, has been ordered to pay over $20m as part of a deal with three US authorities to resolve an investigation into a former employee’s fraudulent trading tactics to manipulate the US Treasuries market.
TD Securities (TDS), a division of TD Bank, entered into a three-year deferred prosecution agreement, the US Department of Justice (DOJ) said in a press release and a filing with the New Jersey federal court.
The agreement will end the criminal and civil probes, which included civil investigations by the SEC and FINRA (not yet published).
The allegations revolve around the firm’s former employee, a trader named as Jeyakumar Nadarajah, “placing hundreds of fraudulent spoof orders amounting to tens of billions of dollars of false supply and demand in the secondary market for US Treasuries”.
He was charged in November with 16 counts of fraud and securities manipulation based on the alleged spoofing that took place between 2018 and 2019 and is awaiting trial.
Spoofing and internal controls
“Spoofing” is defined as a series of events in which a trader places and immediately cancels a quote in an attempt to trigger a market movement that the trader then takes advantage of to establish or liquidate a position.
According to the SEC’s order, between April 2018 and May 2019, the former TDS trader spoofed the US Treasury cash securities market by entering orders on one side of the market that he had no intention of executing so he could obtain more favorable execution prices on bona fide orders he was entering simultaneously on the other side of the market.
The SEC’s order also said that TDS lacked adequate controls and failed to take reasonable steps to scrutinize the trader after receiving warnings of his potentially irregular trading activity.
After the bona fide orders were filled, resulting in profits to TDS, the trader allegedly then canceled the non-bona fide orders.
“Manipulative and deceptive trading undermines the integrity of our markets,” said Mark Cave, Associate Director in the SEC’s Division of Enforcement. “Broker-dealers and other firms cannot ignore their employees’ manipulative conduct and must take meaningful steps to detect and prevent it. Today’s action results from our continuing commitment to combating illicit trading.”
A failure to act
In August 2018, a TDS in-house surveillance system in a market other than the US Treasury cash market generated an alert for potential spoofing by the trader, the SEC said.
This spoofing alert generated by the surveillance system required a review by the Trader’s supervisor as well as TDS compliance, but the SEC said TDS did not conduct the investigation required under its internal procedures, and the trader continued to trade without further supervision.
TDS has also agreed to enhance its compliance program and appropriate and report to DOJ regarding remediation and its ongoing implementation of the enhanced compliance program.
In October 2018, a third-party trading platform identified a pattern of potential spoofing in the trader’s trading activity in the US Treasury cash market for TDS. In response, TDS solicited an explanation from the trader and provided the explanation to the trading platform, but the firm, once again, did not perform any additional review of the trades in question, and the trader continued to trade without heightened supervision by TDS, the SEC said.
In May 2019, a different trading platform contacted TDS regarding a pattern of rapid order placements and cancellations by the Trader in US Treasury cash securities, and the platform provided TDS with the supporting data that prompted the outreach. TDS suspended the trader the next day and started its own investigation.
Penalties and rule violations
TDS will pay a $12.5m criminal penalty to resolve civil investigations by the SEC and FINRA, and it will pay about $9.5m as a criminal penalty to the DOJ. TDS has also agreed to pay $4.7m in victim compensation and $1.4m in forfeiture.
TDS was further ordered to cease and desist from future violations of the relevant antifraud provision, was censured, and was ordered to pay disgorgement of $400,000, prejudgment interest, and a civil penalty of $6.5m.
In a related matter, the firm entered into a deferred prosecution agreement with the DOJ and agreed to pay a total monetary sanction of more than $15m as part of that agreement, of which $400,000 will be credited by disgorgement to the SEC. TDS has separately agreed to pay a $6m fine to FINRA to resolve related charges.
The SEC charged TDS with fraud in the sale of securities, saying it violated Section 17(a)(3) of the Securities Act.
TDS has also agreed to enhance its compliance program as appropriate and report to the DOJ regarding its remediation efforts and its ongoing implementation of an enhanced compliance program.
Money laundering allegations
The spoofing settlement actions come as TD Bank deals with separate allegations that it failed to catch money laundering and other financial crimes at several US branches, with prosecutors having filed cases in New York, New Jersey and Florida. The WSJ reported last week, citing people familiar with the matter, that the bank is nearing a resolution to the money-laundering probe with a guilty plea expected within the next two weeks.
