Fines for mismarked trades paid like traffic tickets for Wall Street traders

As commonplace as starlets on reality TV, million dollar fines are seemingly levied without much fanfare on Wall Street by the SEC and other industry groups.

What isn’t apparent is that a fine like this is the equivalent of a traffic ticket to the hallowed investment houses headquartered in New York.

The $12 million fine paid by UBS

Securities amounted to a traffic

ticket when the scale of the

offense is considered.

On Oct. 11, 2011, UBS Securities was fined $12 million for violating Regulation SHO (Reg SHO) and failing to properly supervise short sales of securities.

While most companies would have to shut down after paying such a penalty, the fine is minuscule when some context is provided.

The Financial Industry Regulatory Authority (FINRA) estimated that 10 million trades were made without the sales fulfilled by UBS because the sales were marked as "long," resulting in additional significant violations of Reg SHO's locate requirement.

UBS thus paid $1.20 for each of the violations over a less than six-year period.

Short selling is used to anticipate a price fall, but exposes the seller to the risk of a price rise. Company stocks caught up in Reg SHO violations usually see their stock price plummet, their equity become devalued and their personal worth vastly reduced.

“It’s pretty sad that a company gets destroyed just because their name is on a stock that’s being manipulated,” said Wes Christian, senior partner at Christian Smith & Jewell in Houston and lead attorney in its securities law practice.

In a short sale, the seller sells a security it does not own. When it is time to deliver, the short seller either purchases or borrows the security to complete the delivery. Reg SHO requires a broker-dealer to have reasonable grounds to believe that the security could be borrowed and available for delivery before accepting or effecting a short sale order.

Requiring firms to obtain and document this "locate" information before the short sale occurs reduces the number of potential failures to deliver in equity securities. In addition, Reg SHO requires a broker-dealer to mark sales of equity securities as long or short.

FINRA, the largest independent regulator for all securities firms doing business in the United States, assessed

the fine after the investigation to which UBS agreed not to deny the charges or make any statement inconsistent with the letter of acceptance, waiver and consent.

Misclassification of trades that should have been listed as long trades were instead classified as short selling.

FINRA, the independent regulator

for U.S. securities trading firms,

levied the fine against UBS Securities

after UBS agreed not to deny the charges.

FINRA goes on to say that the company likely mismarked tens of millions of dollars of sales orders through the relevant period.

FINRA became the recipient of mismarked sales orders through the UBS blue sheet submissions, causing the firm to make inaccurate submissions of trading data.

The orders then were inaccurately submitted by UBS to the Automatic Confirmation Transaction service and the Order Audit Trail System.

Only in 2009 did the firm put its supervisory framework in place over its equities to achieve compliance with FINRA’s requirements of Reg SHO and the other securities laws, rules and regulations.

For more information on securities law, go to www.csj-law.com or contact Christian Smith & Jewell at 713-659-7617.