Wedbush ignored multiple red flags that one of its brokers was engaged in a six-year pump-and-dump scheme, including an email that outlined the broker's role in the fraud, the SEC charges.
The regional BD failed to properly document its own investigations in the matter, and couldn't answer some SEC questions about who knew what and when, the regulator says.
It's the second regulatory action the SEC has taken against the Los Angeles-based firm this year, and the third since 2014,
"This case sends a clear message that we will not tolerate broker-dealers that fail to exercise appropriate supervision over employees," said Marc Berger, director of the SEC’s New York Regional Office in an email.
A spokeswoman for Wedbush declined to comment on the charges.
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The regulator found the firm was deficient on capital requirements and, on 84 occasions, did not accurately calculate its customer reserve requirements.
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The recruit also previously worked for Morgan Stanley, Merrill Lynch and RBC.
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Edward Wedbush allegedly failed to supervise mandated regulatory filings.
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The regulator's rebuke of Wedbush centers on the firm's alleged failure to supervise Timary Delorme who was purportedly engaged in a manipulative trading scheme with Izak Zirk Engelbrecht from 2008 to 2014.
Engelbrecht has since pleaded guilty to several counts of fraud brought by the commission and is serving 151 months in prison.
As part of the scheme, Engelbrecht compensated Delorme for buying certain stocks in her clients' accounts or encouraging clients to buy the stocks, according to the SEC.
Delorme's supervisors at Wedbush became aware of several red flags in 2012, the SEC says. Those warning signs included: reviewing an email outlining her role in fraudulent penny stock transactions; receiving copies of two FINRA arbitrations filed by her clients related to those same penny stocks; being apprised of FINRA inquiries into Delorme's personal trading in one of those penny stocks as well as allegations underlying the client arbitration cases.
Despite these warning signs, Wedbush permitted Delorme to continue serving clients, the SEC says.
The company, which was founded by current President Edward W. Wedbush in 1955, conducted two flawed investigations by its legal and compliance departments into the Delorme’s conduct, the SEC says. Wedbush had no process outlined for documenting the results of its investigations, resulting in an incoherent response to inconsistencies the agency has identified, according to the agency.
Delorme was placed on heightened supervision in March 2014, but Wedbush has no documentation explaining which manager made that decision and why it was an appropriate measure.
"It is unclear what, if anything, was reported from legal or compliance to Wedbush’s management,"
The SEC's charges will be heard before an administrative law judge at a to-be-announced date.
Separately, Delorme agreed to the entry of an SEC order that she violated the antifraud provisions of federal securities laws. She has agreed to pay a $50,000 penalty and consented to an SEC bar, the commissions says.
"Ms. Delorme was a longstanding honorable broker with a stellar reputation in the industry," said Paul S. Meyer, an attorney for Delorme. "Her involvement was the result of manipulations of a swindler who has now been sent to prison. She resolved this matter without an admission of liability, and to avoid further distraction."
Delorme, 59, has been an employee of Wedbush for more than 40 years and a registered representative since 1981.
Two client complaints against her were settled in 2013 for $50,000 and $265,000 respectively, according to FINRA BrokerCheck records. A third case involving $250,000 in alleged damages is pending.
This is not the first time that Wedbush has been under regulatory scrutiny. In addition to SEC actions, FINRA has fined or sanctioned the brokerage firm on occasion. Last month, FINRA fined Wedbush $1.5 million for violating customer protection and net capital rules as well as related supervisory and record-keeping failures.
Wedbush has approximately 647 registered individuals operating from approximately 100 branch offices.
