A number of trading and clearing blunders by Wedbush Securities Inc. pertaining to a customer’s redemption activity and trading of leveraged ETFs has led FINRA and the NASDAQ Stock Market to fine the firm $675,000.

Wedbush acted as the clearing firm for its broker-dealer customer, Scout Trading, and as an authorized participant of varying exchange-traded funds. This allowed the firm to send redemption/creation orders on Scout Trading’s behalf and on the behalf of its other clients, according to FINRA.

Between January 2010 and March 2012, Scout Trading was insufficiently long in the ETF shares comprising the redemption orders. Throughout the review period, Scout Trading sent at least 255 naked redemption orders through Wedbush in eleven ETFs, equaling more than 295 million shares.  This naked redemption activity, together with short selling of ETFs on the secondary market by Scout Trading, ended up with numerous substantial failures to deliver by Wedbush.

According to the SEC, failures to deliver may result from either a short or a long sale and may result from “naked” short selling. In naked short sales, the seller does not borrow or arrange to borrow securities in time to make delivery to the buyer within the standard three-day settlement period. As a result, the seller fails to deliver the securities to the buyer when delivery is due, called a failure to deliver.

FINRA says Scout Trading entered creation orders, used to create new shares of the ETFs, through Wedbush to close out the failures to deliver. However, Scout Trading, soon after, entered further naked redemption orders, or engaged in additional secondary market selling activity in the ETFs, through or with the assistance of Wedbush, that led to failures to deliver redeveloping at Wedbush, according to FINRA. This pattern of naked redemption orders followed by creation orders resulted in persistent and sustained failures to deliver at Wedbush, and was profitable but impermissible.

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-741-7503 to discuss your potential legal remedies or complete the contact form.