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NASDAQ PHLX LLCLETTER OF ACCEPTANCE, WAIVER AND CONSENT
NO. 2017054491008
TO:Nasdaq PHLX LLC
c/o Department of Enforcement
Financial Industry Regulatory Authority (“FINRA”)

RE:

Wedbush Securities Inc., Respondent
Member Firm
CRD No. 877

Pursuant to Rule 9216 of Nasdaq PHLX LLC (“Phlx”) Code of Procedure, 1 Wedbush Securities
Inc. (the “firm” or “Respondent”) submits this Letter of Acceptance, Waiver and Consent(“AWC”) for the purpose of proposing a settlement of the alleged rule violations described
below. This AWC is submitted on the condition that, if accepted, Phlx will not bring any future
actions against the Respondent alleging violations based on the same factual findings describedherein.
I.
ACCEPTANCE AND CONSENT
A.

Respondent hereby accepts and consents, without admitting or denying the findings, andsolely for the purposes of this proceeding and any other proceeding brought by or on
behalf of Phlx, or to which Phlx is a party, prior to a hearing and without an adjudicationof any issue of law or fact, to the entry of the following findings by Phlx:
BACKGROUND
The firm has been a FINRA member since 1955 and a Phlx member since June 2006. Thefirm is a full-service broker-dealer headquartered in Los Angeles, CA, which has
approximately 70 branch offices and approximately 510 registered employees. The firm
provides, among other things, brokerage, wealth management, and investment bankingservices.
RELEVANT PRIOR DISCIPLINARY HISTORY
In January 2019, the firm was censured and fined $1,000,000 by NYSE Arca, Inc.
(“NYSE Arca”) and ordered to complete several undertakings in connection with, among
other violations, its failure to establish, document, and maintain a system of risk
management controls and supervisory systems reasonably designed to ensure compliancewith regulatory requirements regarding detection and prevention of potentiallymanipulative activity, including but not limited to wash sales, and marking the open and1

Series 9000 of The Nasdaq Stock Market LLC Rules are incorporated by reference into Phlx Rule General 5,Section 3, and are thus Phlx Rules and thereby applicable to Phlx members, member organizations, persons
associated with member organizations, and other persons subject to the Exchange’s jurisdiction.

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In December 2015, the firm was censured and fined $1.8 million by FINRA, The Nasdaq
Stock Market LLC (“Nasdaq”), NYSE Arca, and Cboe BZX Exchange, Inc. (“BZX”) for
violations of Exchange Act Rule 15c3-5, and applicable FINRA and exchange
supervisory rules, from January 2008 through August 2013. The firm agreed to, among
other things, findings that the firm failed to establish, maintain, and enforce supervisorysystems and procedures related to its market access business, and failed to supervise forpotentially manipulative trading.
In November 2014, the firm entered into a settlement with the U.S. Securities andExchange Commission (“SEC”) in which it agreed to pay $2.44 million for findings that,from July 2011 until at least January 2013, the firm willfully failed to establish,
document, and maintain a system of risk management controls and supervisory
procedures that was reasonably designed to manage the risks associated with its market
access business and applicable regulatory requirements regarding potentiallymanipulative trading, such as wash sales and manipulative layering.
SUMMARY
From June 2015 through the present, the firm has provided certain customers with accessto third-party electronic trading platforms (“electronic trading customers”), which allows
these customers to enter orders for execution using one of the firm’s market participant
identifiers (“MPIDs”). Those orders are transmitted to other broker-dealers that may
route them to various exchanges for execution using the executing broker-dealer’s MPID.
The firm failed to conduct supervisory reviews of its electronic trading customers’
trading activity for any type of potentially manipulative trading, including layering,
spoofing, wash sales, or marking the close or open. Instead, the firm relied upon thethird-party broker-dealers to conduct such reviews.
Also, since June 2015, the firm failed to supervise the trading activities of its proprietary
traders and other firm customers for potential layering and spoofing.
Based on the conduct described in this AWC, the firm violated Phlx Rules General 9,
Sections 1(a) and 20(a), and Phlx Rules 707 and 748.
FACTS AND VIOLATIVE CONDUCT
1. This matter arises from cross market surveillance conducted by FINRA on behalf of Phlx.
Applicable Rules
2. Phlx Rule General 9, Section 20, and its predecessor Phlx Rule 748, require each member
to “establish, maintain, and enforce written supervisory procedures, and a system forapplying such procedures, to supervise the types of business(es) in which the member ormember organization engages in and to supervise the activities of all registeredSTAR No. 20170544910 GEJ2              

representatives, employees, and associated persons. The written supervisory procedures
and the system for applying such procedures shall reasonably be designed to prevent anddetect, insofar as practicable, violations of the applicable securities laws and regulations,
including the By-Laws and Rules of the Exchange.” 2
3. Phlx Rule General 9, Section 1(c), and its predecessor Phlx Rule 707, provide that “[a]member or member organization shall not engage in conduct inconsistent with just andequitable principles of trade.” A violation of Phlx Rule General 9, Section 20 also
constitutes a violation of Phlx Rule General 9, Section 1(c) or Phlx Rule 707. 3
The firm failed to review electronic trading customers’ trading activities for potential
manipulation
4. The firm permitted certain customers to enter orders directly onto third-party electronic
trading platforms using the firm’s MPID. The firm separately executed transactions for
its proprietary traders and other customers through its own internal trading systems.
5. For various reasons, including the disciplinary actions described in the Relevant Prior
Disciplinary History section above, Wedbush stopped providing market access services
to its customers in June 2015. As described above, however, the firm still provided
certain electronic trading customers with access to third-party electronic trading
platforms, which routed these customers’ orders to other broker-dealers for execution.
6. The firm mistakenly believed that it was not required to review this trading for any typeof potentially manipulative activity since it was no longer providing market access.
Instead, the firm believed that the obligation to review this trading for potentiallymanipulative activities rested solely with the executing broker-dealers. Thus, since June
2015, the firm did not conduct any supervisory reviews of the trading activities by its
electronic trading customers for potentially manipulative trading, such as layering,spoofing, wash sales, or marking the close or open.
7. As a result, Wedbush failed to detect potential layering activity in February and March2017 by an institutional electronic trading customer, which was comprised of hundreds offoreign day traders, on various exchanges, including Phlx. During those two months,
FINRA surveillance identified approximately 2,900 layering exceptions involving over
130 different stock symbols associated with the customer’s order flow. On March 13,
2017, the executing broker-dealer for that order flow detected the potential layering,
provided notice of the potential layering to the firm, and stopped accepting orders fromthe customer.
8. Upon receiving notice of the potential layering activity from the executing broker-dealer,
the firm closed the electronic trading customer’s account. The firm, however, did not takeany steps to detect and prevent other electronic trading customers from engaging in2

Phlx Rule General 9, Section 20(a) superseded Phlx Rule 748, effective February 3, 2020.

3 Phlx Rule General 9, Section 1(c) superseded Phlx Rule 707, effective February 3, 2020.

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potentially manipulative trading, or to implement any type of supervisory reviews forpotentially manipulative trading. As a result, from June 2015 through the present,
approximately 90 electronic trading customers effected more than 3.4 million
transactions involving 13.5 billion shares without being subject by Wedbush to any
review for potentially manipulative trading.
The firm also failed to supervise its proprietary traders’ and all firm customers’transactions for potential layering and spoofing
9. Since June 2015, the firm also failed to implement any supervisory system, including
written supervisory procedures (“WSPs”), to review for potential layering and spoofingby the firm’s proprietary traders and all firm customers, including the firm’s electronic
trading customers.
10. Between June 2015 and May 2019, the firm’s WSPs failed to include any procedures
requiring a review by the firm for potential layering and spoofing activity. In June 2019,the firm added a reference to layering and spoofing in its WSPs, which required thefirm’s Equity Trading Managers to conduct weekly reviews of certain supervisory reports
to detect potential layering and spoofing. Those reports, however, were designed tocapture other forms of potential manipulative trading, such as wash sales and marking theopen and close, and were not reasonably designed to detect layering and spoofing.
11. As a result, from June 2015 to the present, the firm also failed to supervise its proprietary
traders and other firm customers for potential layering and spoofing activity, and anadditional 26.9 million transactions involving approximately 5.1 billion shares were notreviewed by the firm for potential layering and spoofing.
12. Therefore, the firm violated Phlx Rules General 9, Sections 1(c) and 20(a), and Phlx
Rules 707 and 748.
B.

Respondent also consents to the imposition of the following sanctions:a censure;a total fine of $975,000, of which $82,142.86 shall be paid to Phlx; 4 andan undertaking that, within 90 days of the date this AWC is accepted, the firmshall submit a written report to FINRA, certified by a registered principal of thefirm, that details the steps taken by the firm to correct the supervisory deficiencies
regarding supervision of manipulation and the date(s) the revised supervisorysystem and WSPs were implemented. The report shall be submitted toCompliance Assistant, FINRA Department of Enforcement, 15200 Omega Drive,

4 The remainder of the fine will be paid to FINRA; Cboe BYX Exchange, Inc. (“BYX”); BZX; EDGA Exchange,Inc. (“EDGA”); Cboe EDGX Exchange, Inc. (“EDGX”); Nasdaq; Nasdaq BX, Inc. (“BX”); New York Stock
Exchange LLC (“NYSE”); NYSE Arca; and Investors Exchange LLC (“IEX”).

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Third Floor, Rockville, MD 20850 and by e-mail from a work-related account of
the registered principal to EnforcementNotice@FINRA.org.
Acceptance of this AWC is conditioned upon acceptance of parallel settlementagreements in related matters between the firm and FINRA; BYX; BZX; EDGA; EDGX;Nasdaq; BX; NYSE; NYSE Arca; and IEX.
Respondent agrees to pay the monetary sanction in accordance with its executed
payment form.
Respondent specifically and voluntarily waives any right to claim that it is unable to pay,
now or at any time hereafter, the monetary sanction imposed in this matter.
The sanctions imposed herein shall be effective on a date set by FINRA staff.
II.
WAIVER OF PROCEDURAL RIGHTS
Respondent specifically and voluntarily waives the following rights granted under Phlx’s Codeof Procedure:A.

To have a Formal Complaint issued specifying the allegations against the firm;B.

To be notified of the Formal Complaint and have the opportunity to answer theallegations in writing;C.

To defend against the allegations in a disciplinary hearing before a hearing panel,to have a written record of the hearing made and to have a written decision issued;
andD.

To appeal any such decision to the Exchange Review Council and then to the U.S.
Securities and Exchange Commission and a U.S. Court of Appeals.

Further, Respondent specifically and voluntarily waives any right to claim bias or prejudgmentof the Chief Regulatory Officer, the Exchange Review Council, or any member of the Exchange
Review Council, in connection with such person’s or body’s participation in discussions
regarding the terms and conditions of this AWC, or other consideration of this AWC, including
acceptance or rejection of this AWC.
Respondent further specifically and voluntarily waives any right to claim that a person violated
the ex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144,
in connection with such person’s or body’s participation in discussions regarding the terms andconditions of this AWC, or other consideration of this AWC, including its acceptance orrejection.

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OTHER MATTERS
Respondent understands that:A.

Submission of this AWC is voluntary and will not resolve this matter unless anduntil it has been reviewed and accepted by FINRA’s Department of Enforcement
and the Exchange Review Council, the Review Subcommittee, or the Office ofDisciplinary Affairs (“ODA”), pursuant to Phlx Rule 9216;

B.

If this AWC is not accepted, its submission will not be used as evidence to prove
any of the allegations against the Respondent; andC.

If accepted:

D.

1.

This AWC will become part of the Respondent’s permanent disciplinary
record and may be considered in any future actions brought by Phlx or any
other regulator against the Respondent;

2.

Phlx may release this AWC or make a public announcement concerning
this agreement and the subject matter thereof in accordance with Phlx
Rule 8310 and IM-8310-3; and3.

Respondent may not take any action or make or permit to be made any
public statement, including in regulatory filings or otherwise, denying,directly or indirectly, any finding in this AWC or create the impressionthat the AWC is without factual basis. Respondent may not take any
position in any proceeding brought by or on behalf of Phlx, or to which
Phlx is a party, that is inconsistent with any part of this AWC. Nothing inthis provision affects the Respondent’s right to take legal or factual
positions in litigation or other legal proceedings in which Phlx is not aparty.

Respondent may attach a Corrective Action Statement to this AWC that is astatement of demonstrable corrective steps taken to prevent future misconduct.
Respondent understands that it may not deny the charges or make any statementthat is inconsistent with the AWC in this Statement. This Statement does notconstitute factual or legal findings by Phlx, nor does it reflect the views of Phlx orits staff.

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The undersigned, on behalf of the firm, certifies that a person duly authorized to act on its behalf
has read and understands all of the provisions of this AWC and has been given a full opportunity
to ask questions about it; that the firm has agreed to the AWC’s provisions voluntarily; and that
no offer, threat, inducement, or promise of any kind, other than the terms set forth herein and theprospect of avoiding the issuance of a Complaint, has been made to induce the firm to submit it.
 ____________________
Date

Wedbush Securities Inc.
Respondent
By: ______________________
  
Name: ____________________
 Title: _____________________

Reviewed by:_______________________
Patrick Smith, Esq.
Counsel for Respondent
Katten Muchin Rosenman LLP
2029 Century Park East, Suite 2600
Los Angeles, CA 90067-3012
Accepted by Phlx:

_________________
Date_______________________
Gary E. Jackson
Senior Counsel
FINRA Department of Enforcement
Signed on behalf of Phlx, by delegatedauthority from the Director of ODA

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