NASDAQ PHLX LLCLETTER OF ACCEPTANCE, WAIVER AND CONSENT
NOS. 2011029713014 & 2012033667305
TO:

Nasdaq PHLX LLC
c/o Department of Enforcement
Financial Industry Regulatory Authority (“FINRA”)

RE:

Lek Securities Corporation, Respondent
Member Firm
CRD No. 33135
Samuel Frederik Lek, Respondent
Associated Person
CRD No. 1642936

Pursuant to Rule 9216 of Nasdaq PHLX LLC (“PHLX”) Code of Procedure, Lek Securities
Corporation (“LSCI” or the “Firm”) and Samuel Frederik Lek (“Lek,” and together with LSCI,“Respondents”) submit this Letter of Acceptance, Waiver and Consent (“AWC”) for the purposeof 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
Respondents alleging violations based on the same factual findings described herein.
I.
ACCEPTANCE AND CONSENT
A.

Respondents hereby accept and consent, 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
adjudication of any issue of law or fact, to the entry of the following findings by PHLX:
Summary of Action

1.
This matter stems from an investigation by FINRA’s Department of Market
Regulation, on behalf of multiple exchanges, including PHLX, which found that between
October 1, 2010 and June 30, 2015 (the “Equities Market Review Period”), LSCI and Lek aided
and abetted manipulative trading (“layering”) by “Avalon,” a customer of the Firm whosemaster-sub account was known as “the Avalon account.” LSCI also aided and abetted Avalon in
the operation of an unregistered broker-dealer through the Avalon account. In addition, LSCI
committed, and Lek caused, Market Access Rule violations; LSCI and Lek committed
supervisory violations; and LSCI committed numerous ancillary violations concerning retentionof electronic communications, and other supervisory violations pertaining to the failure to
conduct periodic examinations of customer accounts, review of electronic communications,

Central Registration Depository (“CRD”) information, and outside business activities. The
violations occurred on numerous exchanges, including PHLX.
2.
Between August 1, 2012 and June 30, 2015 (the “Options Market Review
Period”), LSCI and Lek provided direct market access to non-registered options market
participants to multiple market centers, including PHLX. While providing such access, LSCI
and Lek aided and abetted manipulative options trading in the Avalon account.
3.
Taken together, the various violations demonstrate that LSCI and Lek knowingly
or with extreme recklessness aided and abetted the misconduct occurring in the Avalon accountthroughout the relevant periods simply because the Avalon account brought in sufficient businessto the Firm to make it profitable, notwithstanding numerous red flags and ongoing investigations
into the activity by FINRA, the Securities and Exchange Commission (“SEC”), PHLX and otherexchanges.
Respondents and Jurisdiction
4.
LSCI is a Delaware corporation headquartered in New York, NY, and has beenregistered with FINRA since April 1, 1996, and with Nasdaq PHLX since November 13, 1995.
LSCI operates as an independent order-execution and clearing firm providing customers direct
market access to numerous exchanges. LSCI is a member of the following securities exchanges
that are relevant to this AWC: The NASDAQ Stock Market LLC (“Nasdaq”); NASDAQ BX,
Inc. (“BX”); NYSE LLC (“NYSE”); NYSE Arca, Inc. (“NYSE Arca”); NYSE American LLC,
formerly NYSE MKT LLC and AMEX LLC (“NYSE American”); Cboe Exchange, Inc.
(“Cboe”); Cboe BZX Exchange, Inc. (“BZX”); Cboe BYX Exchange, Inc. (“BYX”); Cboe
EDGA Exchange, Inc. (“EDGA”); Cboe EDGX Exchange, Inc. (“EDGX”); and NASDAQ ISE,
LLC, formerly the International Securities Exchange, LLC (“ISE”). PHLX has jurisdiction over
LSCI because it is currently registered as a PHLX-member firm, and it committed the
misconduct at issue while a member.
5.
Lek has been employed in the securities industry since August 1986, and founded
the Firm in January 1990. At all times during the relevant periods, Lek has been the owner,
CEO, and Chief Compliance Officer (“CCO”) of LSCI. Lek became registered with PHLX as a
General Securities Representative with LSCI on October 9, 2010. Lek was registered in suchcapacity, as well as in other capacities, with LSCI during the relevant periods. He was registeredat PHLX with LSCI until October 7, 2019, when LSCI filed a Form U5 terminating Lek’s
registration with PHLX. Although Lek is no longer registered or employed with a PHLX
member firm, he remains subject to PHLX jurisdiction for purposes of this proceeding pursuant
to PHLX Rule 8310, because (1) the Complaint was filed prior to the effective date of
termination of Lek’s registration with PHLX, and (2) the Complaint charges him withmisconduct committed while he was registered with PHLX.

2

Statement of Facts
a. Background
Master-Sub Account Structure
6.
In the master-sub account trading model, a top-level customer typically opens anaccount with a registered broker-dealer (the “master account”) that permits the customer to havesubordinate accounts for different trading activities (the “sub-accounts”). The master account isusually subdivided into sub-accounts for the use of individual traders or groups. In someinstances, the sub-accounts are further divided to such an extent that the master account customer
and the registered broker-dealer with which the master account is opened may not know theactual identity of the underlying traders.1
7.
Although master-sub account arrangements may be used for legitimate businesspurposes, some customers who seek to use master-sub account relationships structure theiraccount with a broker-dealer in this fashion in an attempt to avoid or minimize regulatory
obligations and oversight.2
8.
A sub-account trader may, for example, open multiple accounts under a single
master account and proceed to effect trades on both sides of the market to manipulate a stock
price by entering orders to drive the price up, mark the close, or engage in other manipulative
activity. Such conduct may create the false appearance of activity or volume and, as a result,
may fraudulently influence the price of a security.3
Origins of the Avalon Account at LSCI
9.
Genesis Securities, LLC (“Genesis”) was previously a broker-dealer and amember of FINRA. Sergey Pustelnik a/k/a Serge Pustelnik (“Pustelnik”) was previously aregistered representative at Genesis.
10.
Pustelnik handled the Regency Capital (“Regency”) account at Genesis, which
was a focus of a FINRA investigation into the operation of unregistered broker-dealers throughmaster-sub accounts. The Regency account was a master-sub account that provided market
access to foreign traders. One of its sub-accounts was called “Avalon.”
11.
The Avalon sub-account, in turn, was a master-sub account with sub-accounts inwhich Russian and Ukrainian individuals traded. The Avalon group of traders was originallybrought to the Regency account by “NF,” who was a close friend of Pustelnik, and “AL,” whowas Pustelnik’s brother-in-law.
SEC Office of Compliance Inspections and Examinations National Exam Risk Alert, Vol. 1, No. 1, pp. 1-2 (Sept.
29, 2011).
1

2

Id.

3

Id., pp. 6-7.

3

12.
While at Genesis, Pustelnik had an assistant, “SVP,” who received paychecks
from Avalon.
13.
On September 8, 2010, in the midst of ongoing investigations by the Batsexchanges, FINRA, and the SEC, Pustelnik’s registration with Genesis was terminated.
14.
On September 16, 2010, Genesis closed the Regency account, including the
Avalon sub-account.
15.
NF, who was not registered, became the manager of a newly-incorporated,
purportedly foreign entity called Avalon FA, Ltd.
16.
In October 2010, Pustelnik brought the Avalon traders to LSCI, followed by AL
and SVP, who were hired by LSCI in December 2010 and January 2011, respectively. The
Avalon account at LSCI was opened under the name Avalon FA, Ltd.
17.
SVP was hired to be Pustelnik’s assistant, and AL was hired to be the registeredrepresentative on the Avalon account.
18.
In migrating the Avalon account to LSCI, Pustelnik was paid as a putative“foreign finder” for LSCI, although he was a U.S. citizen.
19.

On March 11, 2011, Pustelnik became a registered representative with LSCI.

20.
Thus, Avalon, as referred to herein, is both a legal entity4 and a group of traders
trading through Avalon’s account at LSCI.
21.
Following the departure of Avalon from Genesis, Genesis withdrew its
application for membership with NYSE on January 20, 2011; was terminated from Nasdaq and
BX on August 8, 2011; expelled from BZX and BYX on May 14, 2012; and its membershiprevoked from EDGA and EDGX on May 16, 2012 for various supervisory violations. The
violations included failing to conduct adequate reviews for potentially manipulative trading
activity; failing to subject to heightened review accounts that posed increased risk, either becauseof the accountholder’s regulatory history, country of origin, employment status, or because of
trading in the account that was the subject of regulatory inquiries; and for failing to supervise andestablish adequate Written Supervisory Procedures (“WSPs”) to address, inter alia, master subaccount arrangements, the use of foreign finders, and review of transactions for suspicious
activity.
22.
On May 21, 2012, Genesis was expelled from FINRA for, inter alia, willful
violations of Section 15(A)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”),
aiding and abetting such violations, willful violations of SEC Rule 17a-4, and supervisory
violations based upon findings that the firm and its CEO operated two unregistered brokerAvalon actually uses two legal entities as alter egos: Avalon FA, Ltd., a purported foreign corporation, and Avalon
Fund Aktiv, a U.S. corporation.
44

dealers through master and subaccount arrangements at the firm, even though the firm and its
CEO were aware that the subaccounts had different beneficial owners, that the master accounts
charged the subaccounts transaction-based compensation, and that the master account profited bycharging commission rates that were higher than the rates they paid to the firm.
23.
On January 21, 2015, Pustelnik was barred from the industry by FINRA for
violating FINRA Rule 8210 when he refused to provide a copy of emails in his personal email
account – an account he used for business purposes at LSCI – in response to a FINRA Market
Regulation request in this matter.
24.
On June 12, 2015, AL was barred from the industry by FINRA for refusing totestify in this matter after asserting his Fifth Amendment privilege against self-incrimination.
Layering, Cross-Product Manipulation (“Mini-Manipulation”), and Spoofing25.
Layering is a form of market manipulation that typically includes placement ofmultiple limit orders on one side of the market at various price levels at or away from the
National Best Bid and Offer (“NBBO”) that are intended to create the appearance of a change inthe levels of supply and demand. In some instances, layering involves placing multiple limit
orders at the same or varying prices across multiple exchanges or other trading venues. An orderis then executed on the opposite side of the market and most, if not all, of the multiple limit
orders are immediately cancelled. The purpose of the multiple limit orders that are subsequently
cancelled is to induce, or trick, other market participants to enter orders due to the appearance ofinterest created by the orders such that the trader is able to receive a more favorable execution on
the opposite side of the market.5
26.
The multiple limit orders that are cancelled are termed “non-bona fide” herein,
while the executed orders are termed “bona fide.” Non-bona fide orders refers to orders that a
trader does not intend to have executed; rather, they are intended to inject false information into
the marketplace about supply and demand for the security at issue and thereby induce othermarket participants to execute against the bona fide orders (i.e., orders that the trader intends tohave executed) for the same security on the opposite side of the market.
27.
The false appearance of supply and demand typically pushes the price in a
direction favorable to the trader, and permits the trader to obtain better prices on the bona fideSee, e.g., FINRA Press Release (Sept. 25, 2012) (“FINRA Joins Exchanges and the SEC in Fining Hold Brothers
More Than $5.9 Million for Manipulative Trading, Anti-Money Laundering, and Other Violations”) (re: In the
Matter of Hold Brothers On-Line Inv. Svcs., LLC, Admin. Proc. No. 3-15046 (Sept. 25, 2012)). Two years prior to
the Hold Brothers press release, FINRA issued a press release announcing fines and sanctions against Trillium
Brokerage Services and others. See FINRA Press Release (Sept. 13, 2010) (“FINRA Sanctions Trillium Brokerage
Services, LLC, Director of Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities
Trading Strategy”) (re: Trillium Brokerage Services, LLC, FINRA STAR No. 20070076782-01 (Aug. 5, 2010). In
doing so, the Trillium press release stated that the firm “entered numerous layered, non-bona fide market moving
orders to generate selling or buying interest in specific stocks. By entering the non-bona fide orders, often in
substantial size relative to a stock's overall legitimate pending order volume, Trillium traders created a false
appearance of buy- or sell-side pressure.” Id.
55

orders, or better prices for that quantity and at that point in time, than would otherwise beavailable.
28.
When both the non-bona fide cancellations and bona fide executions constituting
an instance of layering occur through the same Market Participant Identifier (“MPID”), it istermed a “single-participant” instance. When the non-bona fide cancellations occur through adifferent MPID than the MPID used for the bona fide executions, it is termed a “pair-participant”
instance.
29.
Cross-product manipulation,” or “mini-manipulation,” is a disruptive andmanipulative practice whereby a trader engages in the manipulation of option prices throughtrading in the underlying equities in a short time period. A trader enters trades and ultimately
effects transactions in equity securities to create a false, misleading, or artificial appearance inthe price of the securities and options overlying those securities. Those transactions trigger
activity and price movement in the equity securities, which in turn impacts the price of theoverlying equity options and enables the trader to purchase or sell the equity options at morefavorable prices than would have been available had the triggering transactions not been entered.
30.
“Spoofing” is a form of manipulative trading that involves a market participant
placing non-bona fide orders, generally inside the existing NBBO, with the intention of briefly
triggering some type of response from another market participant, followed by cancellation of
the non-bona fide order, and the entry of an order on the other side of the market.6
31.
LSCI and Lek profited from the layering, cross-product manipulation andspoofing schemes through receipt of commissions from Avalon’s trading.
b.

Manipulative Equities Trading (Layering) in the Avalon Account32.
From November 2010 through June 2015, Market Regulation’s layering
surveillance patterns detected more than 1.7 million instances of layering at LSCI.
33.
Specifically, between November 2010 and July 2012, Market Regulation’s
exchange-specific surveillance patterns detected 5,538 instances of “single-participant” instancesof layering, i.e., an execution on one side of the market (a bona fide order) that was quickly
followed by a number of cancelled orders on the other side of the market (non-bona fide orders),
where both the execution and cancellations occurred through the same LSCI MPID.7
34.
After implementing a cross-market surveillance pattern beginning in August 2012(that is, surveilling for an instance of layering where the execution and cancelled orders occurred
Dodd-Frank Wall Street Reform and Consumer Protection Act §747(5) states: “DISRUPTIVE PRACTICES.—It
shall be unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of aregistered entity that . . . (C) is, is of the character of, or is commonly known to the trade as, ‘spoofing’ (bidding oroffering with the intent to cancel the bid or offer before execution).”6

The surveillance patterns count each layering bona fide execution as an instance of layering, regardless of thenumber of non-bona fide cancellations. Only instances that meet alert criteria, however, are counted.
76

on more than one exchange),8 Market Regulation detected, through the end of June 2015, anadditional 1,213,658 instances of single-participant layering at LSCI.
35.
The cross-market surveillance pattern also detected 485,011 “paired-participant”
instances of layering during the same period, i.e., an execution on one side of the market that wasquickly followed by a number of cancelled orders on the other side of the market, where theexecution but not the cancellations occurred through an LSCI MPID.
36.
As part of its investigation, FINRA requested trading data from LSCI in 224 stock
symbols involved in the reported layering. Review of the trading data confirmed that each
instance reflected actual layering activity (except where the trading data provided by LSCI wasinsufficient to make that determination); i.e., multiple orders were placed on one side of themarket at various price levels at or away from the NBBO, creating the appearance of a change inthe levels of supply and demand, and triggering the price of the security to move. An order wasthen executed on the opposite side of the market at the artificially created price and most, if notall, of the remaining orders were immediately cancelled. While both the bona fide executions
and non-bona fide cancellations occurred in LSCI accounts, transactions were often routed tomultiple exchanges, i.e., cross-market. In total, actual layering activity was confirmed in 217 of
the 224 symbols..
37.
The trading data for the 224 symbols also reveals the prominent role the Avalon
account played in the layering activity at LSCI with respect to the selected symbols. Avalon was
involved to some extent in almost all layering activity (in 215 of the 217 symbols) anddominated it in most instances (in 148 of the 215 symbols, at least 95% of all transactions, i.e.,cancellations or executions, involved Avalon; in 198 of the 215 symbols, at least 50% of alltransactions involved Avalon).
38.
Indeed, Avalon blotter data, mapped into the cross-market data, confirms the roleof the Avalon account in the layering activity at LSCI. In the aggregate, Avalon was involved in
526,052 instances of single-participant layering and 95,515 instances of paired-participant
layering across multiple exchanges during the cross-market surveillance period.
39.
Thus, the Avalon account was involved in approximately 43% of all singleparticipant layering instances and in approximately 20% of all paired-participant layering
instances where the executions occurred at LSCI. The Avalon account was also used inapproximately 81% of all single-participant cancellations and 72% of all paired-participant
cancellations detected at LSCI.
40.
Significantly, LSCI was responsible for just 0.07% of cross-market order flow
volume among all market participants during the cross-market surveillance period, but for
14.79% of all non-bona fide cancellations. Further, during the same period, one out of every 13

The cross-market surveillance period began in August 2012 for some exchanges but as late as October 2014 forothers.
87orders at LSCI was non-bona fide; for all other market participants, the ratio was one out of
every 3,143 orders.9
41.
Below are examples of layering activity in the Avalon account during the Equities
Market Review Period.
Trading in GGGG on March 21, 201242.
On March 21, 2012, at 9:39:01, the NBBO for GGGG was $14.20 (300 shares) x$14.23 (200 shares).
43.
From 9:39:14 to 9:39:15, Avalon placed two orders to sell short a total of 2,000
shares at $14.28.
44.
Beginning just two seconds later, from 9:39:17 to 9:39:58, Avalon placed 105 buyorders (100 shares each) totaling 10,500 shares, with prices increasing from $14.16 to $14.27,
and purchased 1,300 shares at prices ranging from $14.23 to $14.27 based on the entry of theseorders.
45.

At 9:39:58, the NBBO became $14.27 (400 shares) x $14.28 (1,000 shares).

46.
From 9:39:58 to 9:39:59, Avalon received nine executions on its short sell orders
totaling 2,000 shares at $14.28.
47.
Beginning a second later, from 9:40:00 to 9:40:08, Avalon cancelled 92 buy
orders (100 shares each) totaling 9,200 shares.
48.
Thus, as a result of Avalon’s layering, which occurred during a span of 54
seconds, Avalon executed its short sale of 2,000 shares at $14.28, which was a higher price than
it would have received in the absence of such layering.
Trading in HHHH on July 11, 201349.
On July 11, 2013, at 12:54:02.808, the NBBO for HHHH was $38.95 (500 shares)
x $38.96 (900 shares).
50.
From 12:54:04.000 to 12:54:07.000, Avalon placed nine orders to buy a total of
900 shares at prices ranging from $38.96 to $38.97.
51.
Beginning two seconds later, at 12:54:09.000, Avalon placed three orders to sell a
total of 6,000 shares at $38.98. In doing so, Avalon only displayed 1,200 of the shares asavailable for execution; the remaining 4,800 shares were non-displayed.
9

These numbers consider all instances of layering, not just those meeting alert criteria.

852.
Within the next second, at 12:54:09.746, the NBBO became $38.97 (1,200 shares)
x $38.98 (400 shares).
53.
From 12:54:10.000 to 12:54:11.000, Avalon received 17 executions on its sellside orders totaling 6,000 shares at $38.98.
54.
At the same time, from 12:54:10.000 to 12:54:11.000, Avalon cancelled all of thenine buy-side orders.
55.

At 12:54:11.135, the NBBO became $38.96 (100 shares) x $39.00 (1,700 shares).

56.
Thus, as a result of Avalon’s layering, which occurred during a span of sevenseconds, Avalon executed its sale of 6,000 shares at $38.98, which was a higher price than it
would have received in the absence of such layering.
Trading in DDDD on June 6, 201457.
On June 6, 2014, at 9:48:23.698, the NBBO for DDDD was $155.85 (400 shares)
x $156.04 (100 shares).
58.
From 9:48:29.000 to 9:48:30.000, Avalon placed 12 orders to sell short 100
shares each at limit prices ranging from $156.02 to $156.07.
59.
Three seconds later, at 9:48:33.000, Avalon entered three orders (1,000 shareseach) to buy at a limit price of $155.88. In doing so, Avalon only displayed 300 shares of buy
orders for execution; the remaining 2,700 shares of buy orders were non-displayed.
60.
A fraction of a second later, at 9:48:33.244, the NBBO became $155.88 (100shares) x $156.02 (100 shares).
61.
From 9:48:34.000 to 9:48:35.000, Avalon received 23 buy-side executions
totaling 2,500 shares at a price of $155.88 per share. Avalon cancelled the remainder of the buyside orders.
62.

From 9:48:35.000 to 9:48:36.000, Avalon cancelled all of the 12 short sale orders.

63.

At 9:48:37.956, the NBBO became $155.81 (100 shares) x $156.02 (100 shares).

64.
Thus, as a result of Avalon’s layering, which occurred during a span of sevenseconds, Avalon executed its purchase of 2,500 shares at $155.88, which was a lower price than
it would have paid in the absence of such layering.

9

Manipulative Intent of Avalon
65.
The nature of the layering activity, the staggering frequency with which it
occurred, and the absence of a legitimate economic purpose for such activity shows manipulative
intent by Avalon.
66.
Emails show that, in July 2012, Avalon opened an account for “DT,” who claimed
to represent a group of traders from China. DT had previously emailed Lek inquiring about
opening an account at LSCI in which to engage in layering. While Lek appeared to decline
opening the account, Avalon did not.10
67.
Avalon also indicated its intent to permit its traders to engage in layering in askype chat dated March 20, 2013 with a potential customer, if the price were right: “commission
is standard, layering is VERY expensive now, and we pay very big legal bills to protect this. A
lot of firms don’t have this ability and kick traders out. we do.” [sic]. This chat was included inan email dated May 7, 2013 from Avalon FA to the same potential customer in which Avalon
also set the price for layering: “if you need layering strategies and around 2mm bp per account,2000 is per account. . . .”68.
Further, Avalon’s website, as of March 2013, indicated Avalon’s intent to permit
its traders to engage in layering by implying that it was a safe haven for traders wishing toengage in manipulative trading, notwithstanding regulatory risks. For example, Avalon stated on
the English-language version of its website that it would not “blindly shut down anything we
don’t necessarily like” and that “[t]here isn’t a time where our traders are ‘kicked out’ justbecause someone somewhere doesn’t understand or like something. That’s the power of tradingwith a leader.”11
69.
Avalon also stated on its website in August 2013 that: “Our compliance teamworks hard every day to ensure that our traders are able to trade the way they need. When ourinternal team our [sic] not enough, we do not hesitate to employ outside law firms to help us
defend or promote a certain trading strategy. Many of our attorneys are on retainer and we areready to fight for what we believe is just and compliant trading.”
70.
Avalon did not disclose on its website, however, the identity of its “complianceteam.” In reality, Avalon had no compliance team and generally relied on LSCI and Lek for allcompliance issues.
71.
Thus, Avalon touted on its website that it had a compliance team that would
defend and promote its traders’ unlawful trading strategies, rather than a team that would ensure

Lek appears to have declined opening the account due to insufficient trading volume, not the proposed layering
activity.
10

11

http://www.avalonfaltd.com captured on the English version of the website 2013.03.21. The statement appears in
the Professional Compliance section of the web page.

10

compliance with applicable securities laws and regulations. In fact, it had no compliance team atall. This is consistent with Avalon’s intent to permit manipulative trading through LSCI.
LSCI and Lek Provided Substantial Assistance72.
During the Equities Market Review Period, both LSCI and Lek provided
substantial assistance to Avalon’s traders in furtherance of their manipulative layering activity.
73.
LSCI and Lek provided Avalon traders access to United States markets (“market
access”) by permitting the Avalon master account to use an LSCI MPID and an additional MPID
provided to LSCI by another market access provider12 to transmit orders to the exchanges
throughout the relevant period.
74.
LSCI and Lek also provided office space, computer servers, trading software, andthe services of Pustelnik and SVP to essentially manage all aspects of the Avalon account,
including setting up new accounts, negotiating terms for commissions and deposits, acting as theprimary contact on the account, maintaining all Avalon paperwork, tracking profits, performing
back-office and accounting functions, and handling expenses and billing. By providing suchmarket access, office space, personnel, equipment and services, LSCI and Lek provided
substantial assistance to Avalon traders in furtherance of their layering activity.
75.
LSCI and Lek continued to provide substantial assistance and market access for
the Avalon master account and its traders notwithstanding multiple inquiries and warnings from
regulators, and numerous red flags indicating the need to investigate further the manipulative
activity in the Avalon account.
76.
LSCI and Lek also failed to implement, prior to February 2013, any layering
controls for the Avalon account.
77.
On February 1, 2013, after FINRA submitted multiple information requests
regarding LSCI’s layering controls, LSCI implemented so-called “Q6” controls ostensibly tocurtail layering activity.
78.
The Q6 controls blocked orders where the difference, or “delta,” between thenumber of orders on one side of the market exceeds the number of orders on the other side of themarket.
79.
LSCI and Lek, however, disclosed the nature and parameters of the Q6 controls to
NF and thereby overtly permitted Avalon to circumvent the controls.
80.
The default delta for the controls was 10, but it was adjustable. LSCI originallyimplemented the controls at the default delta.
81.
Lek testified that, once implemented, the Q6 controls “virtually had the effect of
shutting down” Avalon.
12

Through Dec. 1, 2013.

11

82.
Avalon then requested LSCI increase the delta to 75. The next week, LSCI
increased the delta for Avalon to 100.
83.
By disclosing the nature of the Q6 controls to Avalon and adjusting its delta upon
Avalon’s request, LSCI and Lek provided further substantial assistance to Avalon to continue
and increase its layering activity.
LSCI and Lek Acted with Scienter
LSCI and Lek Were Aware that Layering Was an Illicit Trading Strategy
84.
On September 13, 2010 – prior to the Avalon account being transferred to LSCI –FINRA announced in a press release that it had censured and fined Trillium Brokerage Services,
LLC (“Trillium”) for engaging in an “illicit” trading strategy that involved the entry of“numerous layered, non-bona fide market moving orders to generate selling or buying interest in
specific stocks.” FINRA further explained that “[b]y entering the non-bona fide orders, often in
substantial size relative to a stock’s overall legitimate pending order volume, Trillium traders
created a false appearance of buy- or sell-side pressure.”13
85.
On February 8, 2012, Lek sent an email to an LSCI employee, “NL,” who, inturn, forwarded the email to Pustelnik. The subject line in the email was “HF Trading” and it
included the following statement by Lek, showing awareness of regulatory concern overlayering:
FINRA continues to be concerned about the use of so-called “momentum ignition
strategies” where a market participant attempts to induce others to trade at artificiallyhigh or low prices. Examples of this activity [include] layering strategies where a market
participant places a bona fide order on one side of the market and simultaneously “layers”
non-bona fide orders on the other side of the market (typically above the offer or below
the bid) in an attempt to bait other market participants to react to the non-bona fide orders
and trade with the bona fide orders on the other side of the market. . . . FINRA has
observed several variations of this strategy in terms of the number, price and size of thenon bona fide orders, but the essential purpose behind these orders remains the same, tobait others to trade at higher or lower prices.
86.
In an email dated September 17, 2012, NL forwarded to Lek an email he received
from LSCI’s Compliance Officer, AS. In the email, AS included a website link to an article inTraders Magazine concerning “layering-spoofing,” with the notation, “Read article below . . .
talks about trillium, genesis, Master-sub.” The article in Traders Magazine described recent
FINRA cases in which Trillium and nine traders settled to a censure and fine of more than $2

FINRA Press Release (Sept. 13, 2010) (“FINRA Sanctions Trillium Brokerage Services, LLC, Director of
Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities Trading Strategy”).
13

12

million for layering and in which Genesis agreed to an expulsion and its CEO agreed to a bar forallowing master-sub account owners to operate as unregistered broker-dealers.14
87.
On September 25, 2012, Lek received notice of an SEC press release regarding
the Hold Brothers settlement with both the SEC and FINRA, pursuant to which Hold Brothers
was fined more than $5.9 million for manipulative trading and anti-money laundering and otherviolations. The SEC press release defined layering as an illegal manipulation.15
88.
Subsequent communications from various exchanges provided further notice thatlayering constituted illegal manipulation and was, potentially, occurring at LSCI. For example,
in July 2013, Bats Global Markets advised Lek of possible layering through LSCI. In November
2013, a NYSE Hearing Board found that LSCI had violated numerous exchange rules including
supervisory failures related to spoofing and that the firm did not have a system to enable it tomonitor for irregular trading, wash sales or marking the close.16 In addition, FINRA issued
Wells’ notices to the Firm beginning in July 2014 advising of potential manipulative trading
taking place through the Avalon account. Thus, LSCI and Lek were aware that layering
constituted an illicit trading strategy.
LSCI and Lek Were Aware of Red Flags
Indicating the Potential for Manipulative Activity in the Avalon Account
89. LSCI and Lek knew or recklessly disregarded information that constituted
red flags alerting them to the potential for manipulative trading in the Avalon account.
90. LSCI and Lek disregarded red flags arising from Pustelnik’s prioremployment at Genesis when Pustelnik introduced Avalon to LSCI. As set forth above,
Traders Magazine Online News, May 24, 2012 “Regulators Finishing Probes on ‘Layering,’ ‘Spoofing’ ofTrades” (Tom Steinert-Threlkeld). http://www.tradersmagazine.com/news/layering-spoofing-trades-equities110033-1.html. The article provides the following description: “In layering, the trading firm or firms involved sendout waves of false orders intended to give the impression that the market for shares of a particular security at thatmoment is deep…The traders then take advantage of the market’s reaction to the layering of orders.”
14

15

SEC Press Release no. 2012-197 (Sept. 25, 2012) further defines layering:
In layering . . . [t]raders placed a bona fide order that was intended to be executed on one
side of the market (buy or sell). The traders then immediately entered numerous non-bonafide orders on the opposite side of the market for the purpose of attracting interest to thebona fide order and artificially improving or depressing the bid or ask price of the security.
The nature of these non-bona fide orders was to induce other traders to execute against theinitial, bona fide order. Immediately after the execution against the bona fide order, theoverseas traders canceled the open non-bona fide orders, and repeated this strategy on the
opposite side of the market to close out the position . . . Traders and the firms that provide
them market access should not labor under the illusion that illegally layering orders amidst
voluminous trading data will somehow allow them to evade detection by the SEC.

See also FINRA Press Release (Sept. 25, 2012) (“FINRA Joins Exchanges and the SEC in Fining Hold Brothers
More Than $5.9 Million for Manipulative Trading, Anti-Money Laundering, and Other Violations”).
Department of Market Regulation v. Lek Securities Corp., Proceeding No. 20110270056 (NYSE Hearing Board
Nov. 14, 2013) (on appeal).
1613LSCI and Lek Were Aware that Layering Was Occurring in the Avalon Accountand Demonstrated the Ability to Prevent It
95. On July 30, 2012, FINRA issued a request for documents to LSCI on
behalf of NYSE Arca, and a second one on September 11, 2012, specifically inquiring
about the trading in the Avalon account and seeking a “more fulsome explanation” as tohow such trading was not consistent with the manipulative practice known as layering.
Lek responded on September 27, 2012, stating its customer’s firm, i.e., Avalon, wasengaged in “market making.”
96. On November 27, 2012, Lek received an email from another broker-dealer(which provided sponsored access to LSCI) stating, “Sam, please see attached emails
from FINRA, who is alleging layering through Lek Securities.”
97. During a phone call on or about July 23, 2013, BZX Market Regulation
explained to LSCI that LSCI was triggering a substantial number of layering alerts
through its MPID and requested that LSCI and Lek put a stop to the layering activity or
BZX would be forced to take steps to terminate LSCI’s access to BZX.
98. Immediately after this conversation, the LSCI layering alerts detected by
BZX Market Regulation (using an exchange-specific surveillance pattern) decreased
from hundreds per day to zero or near-zero. For example, on July 23, 2013, there were1,247 instances of layering (or potential layering) detected on the BZX exchange. By
July 29, 2013, there were none. Further, there were only 16 instances of layering (orpotential layering) detected on BZX over the next twelve months. The alerts similarly
decreased on BYX.
99.
By August 2013, Market Regulation’s investigation of LSCI’s trading had
grown to more than thirty separate matters, nearly all of which involved trading by
Avalon.
100. On August 20, 2013, the Executive Vice President of FINRA Market
Regulation, on behalf of FINRA and eight client exchanges, issued a warning letter to
LSCI and Lek. The letter advised both LSCI and Lek that:Market Regulation continues to have serious concerns with the Firm’s supervisionof its direct market access customers, its regulatory risk management controls, its
ability to detect and prevent violative activity, and its supervisory procedures inconnection with the market access it provides. In addition to these concerns,
Market Regulation is particularly concerned with orders, executions andcancellations relating to Lek customers, specifically including but not limited
to, Avalon FA, Ltd (“Avalon”) . . . Market Regulation expects the Firm to act
promptly to address the foregoing. [Emphasis in original.]

15

101. Following the Bats and FINRA warning letters, LSCI’s layering activity
through the BZX and BYX exchanges remained at very low levels. Approximately one
year later, layering activity began to increase.
102. The decrease in layering activity on BZX and BYX after regulators
threatened to terminate market access, followed by a resumption of that activity
approximately one year later, demonstrates that LSCI and Lek knew that layering was
occurring in LSCI accounts (including Avalon) and that they had the ability to prevent it
if they so desired.
LSCI and Lek Were Aware the Firm had a Reputation for Permitting Layering
103. Both LSCI and Lek were also aware that the Firm had a reputation forallowing persons and entities, outside United States regulatory oversight, to engage inmanipulative trading, including layering, within United States markets.
104. In an email sent to Lek and other LSCI officials on October 26, 2012, by
BW, on behalf of a Chinese trading group, BW inquired “about your open polic[y] withlayering[,]” indicating that LSCI had a reputation for allowing customers to engage insuch manipulative trading:[W]e are a group having many Chinese traders would approach for the last few
months by many US and Canadian affiliates who clear through you. They ALL
say the especially Ms. [SL] in Montreal and others who clears with you have that
LEK is the only clearing firm and compliance department that allows layering andquote stuffing. [W]e are writing you and SEC, asking if it’s true that LEK’s
policy is to allow this type of practice. A lot of Chinese traders recently havebeen thrown out of most US clearing firms because of [H]old [B]rothers’ 6
million fine for this type of exact practice. . . We hear all of [the] layers and quote
stuffers going to [SL] WTS and the other firms with LEK because of your open
policy and weak enforcement policy, they said. [O]nce you ok this to us, we’ll behappy and honored to trade with your company. [W]e are just not sure if this istrue in this biz as other clearing firms are staying away of this type of trading.
Please give me GO AHEAD and we start as we know it goes on at your firm as
we have been watching it daily live.
LSCI and Lek Were Aware of Red Flags Regarding
the Potential for Compliance Issues at Avalon
105. As set forth above, Avalon’s website solicited new traders with language
implying that it was a safe haven for those wishing to engage in manipulative trading,notwithstanding regulatory risks, e.g., that Avalon would not “shut down anything we
don’t necessarily like” or kick out traders because “someone somewhere” doesn’t like it;
and that they had a compliance team that would defend and promote such trading.

16106. LSCI and Lek also knew or were extremely reckless in disregarding
information that Avalon relied upon the Firm for compliance issues.
107. Thus, LSCI and Lek knew or were extremely reckless in disregarding red
flags that Avalon touted itself as a safe haven for manipulators and, at the same time,relied upon LSCI for compliance issues.
LSCI and Lek Claim to Disagree with Regulators that Layering is Illegal
108. LSCI and Lek knowingly or recklessly rejected the statements of regulatorsthat layering was a form of illegal manipulation and appeared willing to permit suchactivity in accounts at LSCI. Between May 2012 and October 2012, Lek exchanged aseries of emails with a potential new customer in which the customer, “DT,” informed
Lek that they wanted to engage in “layering,” i.e., stating explicitly that “we put hundres[sic] of orders to push the stock price and then cancel them” (emphasis added). In
response, Lek stated he does not agree with regulators that such a strategy constituted
illegal manipulation: “regulators have argued that your trading strategy ‘layering’ ismanipulative and illegal. This is of concern to us, even though I do not agree with theirposition” (emphasis added). Lek continued to discuss the possibility of DT opening an
account with LSCI and only appeared to reject DT as a customer because the profits to begenerated from DT’s business were insufficient.17 LSCI’s and Lek’s disregard ofregulators’ warnings was, at a minimum, reckless.
LSCI and Lek Required Avalon to Pay the Firm’s Legal Fees
109. In September 2012, in response to LSCI and Lek’s receipt of FINRA
requests for information, LSCI’s CFO, DH, contacted Pustelnik on multiple occasions
regarding expenses incurred in responding to regulatory inquiries related to Avalon’s
trading activities. For example, on September 7, 2012, DH sent an email with the subject
line: “we need to talk about avalon’s rate...please call me Monday.” In the body of theemail, DH states: “We may have a regulatory case against us that will cost us hundreds ofthousands of dollars to defend.”
110. On September 20, 2012, DH sent an email to Pustelnik, with the subject
line entitled “Avalon or you” and containing the following inquiry: “Can they or you give
us $50,000 that we can put in a separate account as a hold back against real legal fees.”
DH confirmed that he sent the email because Lek had told him that he had been devoting
more time to responding to regulatory inquiries and that it was a good idea to create a socalled “good faith” deposit account for Avalon.
111. DH created the “good-faith” account and funded it in 2012 and 2013 withtransfers from Avalon’s trading account. Subsequent transfers of funds from Avalon’s
account were sometimes made without NF’s permission. Through such transfers, LSCI
obtained approximately $300,000 to $400,000 from Avalon for legal expenses in 2013
alone.
17

Emails show that DT subsequently opened an account with Avalon.

17

Pustelnik’s Scienter Regarding Layering in the Avalon Account is Imputable to LSCI112. Pustelnik was the registered representative at LSCI who brought the
Avalon account to LSCI, partially funded it, effectively controlled it, and had Power ofAttorney over it.
113. LSCI installed servers for Avalon in its office in New York City and in
Pustelnik’s home, with no access provided to LSCI officers.
114. Pustelnik was aware, no later than February 2012, that regulators
considered layering to be a form of manipulation. In September 2012, he was aware that
FINRA was investigating layering activity in the Avalon account.
115. Pustelnik was subsequently involved in handling regulatory inquiries onbehalf of LSCI regarding the layering activity detected in the Avalon account.
116. After certain controls were implemented by LSCI on February 1, 2013,
ostensibly to prevent layering, Pustelnik was involved in loosening those controls over
Avalon.
117. In so doing, Pustelnik knew, or was reckless in not knowing, that Avalon
was engaged in layering activity. As LSCI’s registered representative handling the
Avalon account, Pustelnik was acting within the scope of his duties and thus his scienter
is imputed to LSCI.
LSCI and Lek Admit Knowledge of the Subject Trading
118. In their Wells’ Response of September 5, 2014, regarding allegations that
LSCI and Lek did not reasonably supervise the trading in the Avalon account and lacked
certain controls to address manipulative trading, Counsel for LSCI and Lek admitted on
pp. 2 and 3 that both were aware of the subject trading in the Avalon account:\
Suggesting that LSC and Mr. Lek were unaware of the trading at issue iscontradicted by the facts. Indeed, information provided to the Department [ofMarket Regulation] through documents, OTRs and a presentation show that LSC[LSCI] and Mr. Lek were very aware of the trading, frequently followed up withthe customers for explanations, [and] conducted their own trade analysis.
...
There was an abundance of evidence conclusively demonstrating that LSC andMr. Lek were very knowledgeable of Avalon’s and [another account’s] trading
activity, followed up frequently with the customers to get explanations for certain
trades, and carefully analyzed their trading for any patterns suggestive ofmanipulation. [Emphasis added].

18

119. In sum, LSCI and Lek knew (or were extremely reckless in disregarding)that layering was an illicit trading strategy; that there were red flags associated with thehiring of SVP, AL and Pustelnik and the on-boarding of the Avalon account, and otherred flags that should have prompted inquiry into the trading in the Avalon account; that
there was notice from regulators that layering was suspected in the Avalon account; that
information indicated Avalon touted itself as a safe haven for manipulators; and that
LSCI had asked Avalon and Pustelnik to pay for legal fees incurred as a result of
Avalon’s trading. In addition, LSCI and Lek demonstrated that they could prevent thelayering if they wished, and both admitted that they were aware of the subject trading
activity in the Avalon account. Lek simply disagrees that it should be illegal.
120. Because LSCI and Lek knowingly, or with extreme recklessness, rendered
substantial assistance to Avalon in connection with its manipulative layering activity,
LSCI and Lek aided and abetted the manipulation.
c. Manipulative Options Trading (Cross-product Manipulation and Spoofing) in
Avalon Account
LSCI’s Customer Avalon Engaged in Cross-Product Manipulation
121. During the Options Market Review Period, Avalon, as a customer of LSCI,in hundreds of instances, engaged in activity that constituted cross-product manipulation.
122. In these instances, the Avalon traders engaged in a significant volume ofequity trading on one side of the market in a short period of time, usually in less than
three minutes.
123. Avalon’s equity activity was followed by price movements in the equity
and overlying options, which were impacted by Avalon’s equity activity. Immediately
after triggering this price movement, and within seconds of concluding the equity trades,
the Avalon traders effected option transactions that were more favorably priced as aresult of the traders’ own prior equity trade activity.
124. Avalon’s equity activity created a false, misleading, or artificial appearance
in the price of the securities and options overlying those equities.
125. As an example of the trading that constituted cross-product manipulation,
on August 26, 2013, from 10:14:06 to 10:15:41, Avalon sold 22,616 shares of “DDDD,”
representing approximately 47% of the total trading volume in that stock during that time
period.
126. During that 95-second time window, the share price of DDDD decreased
from $243.00 to $241.84. Avalon’s selling was a significant factor that contributed todepressing the price of equity shares of DDDD, and had a corresponding impact on theprice of the overlying options as a result.

19market access, office space, personnel, equipment and services, LSCI and Lek provided
substantial assistance to Avalon traders in furtherance of their manipulative trading
activity.
152. For more than two years after the start of the Options Market Review
Period, LSCI and Lek continued to enable Avalon to trade directly on PHLX and otherexchanges despite numerous red flags that had specifically identified Avalon as having
engaged in manipulative trading. 21
Scienter
LSCI and Lek Were Aware that Cross-Product Manipulationand Spoofing Constituted Manipulation
153. As previously noted, on February 8, 2012, Lek sent an email to an LSCI
employee, “NL,” who, in turn, forwarded the email to Pustelnik, regarding “HF Trading”
that included a statement by Lek in which he notes FINRA’s concerns with cross-producttrading strategies:
FINRA also is concerned with abusive cross-product HFT strategies and otheralgorithms where stock transactions are effected to impact options prices and viceversa.
154. Further, industry-wide notices and discussions between Lek and FINRA
staff put Lek and LSCI on notice that trading in the Avalon account potentiallyconstituted cross-product manipulation, and posed regulatory and compliance risks. For
example, FINRA’s 2012 Annual Regulatory and Examination Priorities Letter (Jan. 31,2012) set forth FINRA’s concern with abusive cross-product high frequency trading
strategies where stock transactions are effected to impact options prices.
155. FINRA Staff first discussed trading in the Avalon account with Lek on or
about August 20, 2012, when they requested that he review the trading to determine
whether it was manipulative.
156. Staff had follow-up discussions with Lek about the trading activity on or
about November 27, 2012 and January 10, 2013, in which staff articulated their concerns
to the Firm that the trading by Avalon was potentially manipulative.
157. On multiple occasions in response to regulatory inquiries to LSCI about thetrading, LSCI identified Avalon as the responsible customer.
158. Similar to Avalon’s manipulative trading in equities, LSCI and Lek knewthat cross-product manipulative option trading was suspected to be occurring in the
The red flags identified in paragraphs 72-120, regarding PHLX equity trading, are also applicable to its options
market and are hereby incorporated into this section of the Statement of Facts by reference.
21

25

Avalon account. Regulatory discussions with Lek, and inquiries that were sent to theFirm, put both Lek and LSCI on notice of the suspicious trading activity.
159. The manipulative trading in options by Avalon continued unabated despite
LSCI’s receipt of various regulatory inquiries that identified such activity as potentiallyviolative.
160. LSCI and Lek knew or recklessly disregarded information that constituted
red flags that should have alerted them that potentially manipulative trading may havebeen taking place in the Avalon account.
161. Because LSCI and Lek knowingly, or with extreme recklessness, rendered
substantial assistance to Avalon in connection with its manipulative trading activity,
LSCI and Lek aided and abetted the manipulationd. Aiding and Abetting the Operation of an Unregistered Broker-Dealer
Avalon Acted as an Unregistered Broker-Dealer
162. Under Section 15(a)(1) of the Exchange Act, it is unlawful for a brokerdealer to operate without registering with the SEC.
163. Avalon operated through two corporate entities: Avalon FA and “Avalon
Fund Aktiv” (“Avalon Fund”).
164. Avalon Fund was incorporated by AL in New Jersey in 2006. It wasowned and operated by NF, who registered it with Ukrainian authorities as a U.S.
corporation.
165. Avalon Fund operated an office in Kiev, Ukraine, for a small number of
traders. The office was equipped with a telephone line with a U.S. number.
166. Avalon FA was incorporated in the Republic of Seychelles in February2010 by NF, its sole officer and owner.
167. Upon the closing of the Regency account at Genesis, Pustelnik migrated
Avalon traders to LSCI in October 2010, placing them into the master-sub account of
Avalon FA.
168. Neither Avalon Fund nor Avalon FA was registered with FINRA or the
SEC during the relevant period. Further, neither Avalon Fund nor Avalon FA wasregistered with any securities exchange during the relevant period.
169. While Avalon professed to only be a proprietary trading account trading its
own assets, and not a broker-dealer, it is clear that Avalon was operating its master-sub
account as a broker-dealer.
26

170. Typically, broker-dealers provide market access to their clients to trade
their personal assets in return for commissions and fees. Broker-dealers also generally
require clients to deposit their own funds and maintain a minimum balance in order tocontinue trading. Broker-dealer clients are typically retail or institutional customers.
Broker-dealers customarily charge fees to the clients for whom they provide market
access. Additionally, a broker-dealer may charge for access to a trading platform.
171. Proprietary trading accounts, on the other hand, generally trade theaccount-holder’s own assets with professional, non-retail traders who are paid by theaccount holder. Proprietary trading accounts generally do not require a trader to deposit
his or her own funds or maintain a minimum balance. Proprietary trading accountholders generally do not charge fees to their traders or charge for access to a trading
platform.
172. Avalon’s website featured a Russian-language version of the website thatused Avalon Fund, the U.S. entity, as its corporate name, while the English-language
version of the website used Avalon FA, the ostensibly foreign entity, as its corporate
name.
173. The Russian version touted a 1:20 buying power, i.e., a margin requirementof only 5%, compared to 25% under FINRA rules,22 and commissions as low as .00224
USD per share for Avalon Fund.
174. The English version advertised “Access to Global Markets” for traders,
including the U.S. equity and options markets, and stated Avalon FA had offices in the
U.S. It listed LSCI’s address in New York City as its own and listed a phone number
associated with Pustelnik as its “US Direct” number. Voicemail notifications for thenumber were forwarded to Pustelnik’s personal email account.
175. Thus, Avalon solicited clients to open trading accounts with payment ofcommissions and fees, with profits or losses attributed to clients.
176. Most, if not all, of Avalon’s sub-account traders were non-professionals.
Numerous account opening forms establish that they self-identified as non-professionals,
i.e., as retail clients of Avalon, not as proprietary traders.
177. Further, Avalon’s sub-account trading agreements show that clients wererequired to maintain a minimum balance in order to trade; that clients paid transactionbased commissions from each sub-account’s equity, as well as fees; and that clients wereto receive 100% of profits generated and sustain all losses.
178. The agreements show that Avalon was providing services to retail clients asa broker-dealer and not proprietarily trading for its own account.
22

FINRA Rule 4210(c)(1) (effective Dec. 2, 2010; formerly NASD Rule 2520(c)(1)).

27

179. Avalon profited because its commissions for trading in the Avalon accountexceeded those charged to Avalon by LSCI. Avalon further profited by charging various
fees, including fees for traders using ROX, LSCI’s proprietary trading platform, eventhough LSCI did not charge such fees to Avalon.
180. Because the Avalon account bore all of the hallmarks of a broker-dealer
and none of a proprietary trading account, Avalon operated as an unregistered retail
broker-dealer through its account at LSCI in violation of Section 15(a)(1) of the
Exchange Act.
LSCI Provided Substantial Assistance
181. LSCI provided substantial assistance to Avalon regarding its operation as
an unregistered broker-dealer. For example, LSCI provided access to U.S. markets bypermitting Avalon to use an LSCI MPID and an additional MPID provided to LSCI byanother broker-dealer (until terminated by that broker-dealer) to transmit orders to theexchanges throughout the relevant period, notwithstanding multiple inquiries from
regulators and other red flags.
182. Further, LSCI also provided office space, computer servers, trading
software, and the services of Pustelnik and SVP to essentially manage all aspects of the
Avalon account, including setting up new accounts, negotiating terms for commissions
and deposits, acting as the primary contact on the account, maintaining all Avalon
paperwork, tracking profits, performing back-office and accounting functions, andhandling expenses and billing. By providing such market access, office space, personnel,
equipment and services, LSCI provided substantial assistance to Avalon in furtherance of
its operation as an unregistered broker-dealer.
LSCI Acted with Scienter
LSCI Knew or Recklessly Disregarded Information that
Avalon Operated as an Unregistered Broker Dealer
183. Because LSCI employees managed virtually all aspects of the Avalon
accounts, LSCI knew or was extremely reckless in disregarding information that Avalon
was operating as an unregistered broker-dealer. LSCI knew that Avalon charged subaccount clients commissions, received deposits from the sub-account clients, disabled
trading accounts until deposits were received, and that the sub-account clients identified
themselves as non-professionals. Emails show that LSCI knew that Avalon charged
commissions at the sub-account level; that LSCI provided Pustelnik and/or SVP withprofit and loss breakdowns on a trader-by-trader basis; and that LSCI required Avalon to
identify the commission rates for each sub-account.
184. LSCI also knew that employees Pustelnik and SVP had communications inwhich they discussed commission rates, deposit minimums, and other indicia of brokerdealer operations directly with NF, sub-account customers or their group leaders,28evidencing de facto control of Avalon. As one example of such control, SVP signed heremails to LSCI officers as Avalon’s “Head of Finance.”185. Further, via a February 1, 2011 email from NF, LSCI’s CFO received aPower of Attorney authorizing Pustelnik and SVP, “as agent and attorney in fact,” to act
on behalf of Avalon FA “in every respect” and “in all matters,” including buying andselling securities. LSCI was therefore aware that employees Pustelnik and SVP had not
only de facto, but legal control of Avalon.
186. Thus, LSCI knew – or was extremely reckless in disregarding information– that indicated Avalon operated as an unregistered broker-dealer under the control of
LSCI employees Pustelnik and SVP.
LSCI Knew or Recklessly Disregarded Information that Avalon’s
Business Operations Were Centered in the United States
187. In the course of the underlying investigation, LSCI and Lek claimed that
Avalon was exempt from the registration requirement of Section 15(a)(1) of the
Exchange Act because, they contend, Avalon is a “foreign broker or dealer” exempted by
17 CFR § 240.15a-6.
188. To qualify as a foreign broker or dealer, an entity must be engaged in its
business “entirely outside of the United States.” 17 CFR § 240.15a-1(g).
189. Avalon, however, conducted most, if not all of its business, within the
United States and thus was not a foreign broker or dealer.
190. Avalon Fund was incorporated in the U.S. and NF registered it with
Ukrainian authorities as a U.S. corporation.
191. Avalon’s website stated it had U.S. offices, listed LSCI’s New Yorkaddress as its headquarters with a U.S. phone number, and used a photo of LSCI’s
internal conference room as its own. Further, Avalon’s sub-account trading agreements
claimed that Avalon was a New York corporation operating under U.S. law.
192. NF, Avalon’s manager, resided in New Jersey, was a U.S. citizen, andworked out of LSCI’s office in New York. LSCI was aware of these facts because a copyof NF’s U.S. passport was provided to LSCI’s Compliance Officer, “AS,” by email dated
November 1, 2010, when opening the Avalon account at LSCI.
193. Pustelnik, LSCI’s registered representative who brought the Avalon
account to the firm and effectively controlled it, resided in New Jersey and worked out of
LSCI’s office in New York. Pustelnik had Power of Attorney over the Avalon account.
He also performed most, if not all, of the back-office functions for Avalon.

29

194. SVP, LSCI’s employee who identified herself as “Head of Finance” forAvalon, worked out of LSCI’s office in New York and handled Avalon’s accounts andpaid its expenses from a U.S. bank account. SVP also had Power of Attorney over the
Avalon account.
195. AL, Avalon Fund’s registered agent who was also LSCI’s registeredrepresentative for the Avalon account, resided in the U.S. and worked out of LSCI’s
office in New York.
196. Several Avalon FA computer servers were physically located in LSCI’s
office in New York. The servers provided access to Avalon’s billing and financial
records, account information, order entry and trading records. The servers wereaccessible only to Pustelnik and LSCI technical staff.
197. Thus, LSCI knew – or was extremely reckless in disregarding information– indicating that most, if not all, of Avalon’s business operations were centered in the
U.S. and, therefore, that Avalon was not a foreign broker or dealer.
198. Because LSCI knowingly or recklessly rendered substantial assistance to
Avalon’s operation as an unregistered broker-dealer in violation of Section 15(a)(1) of
the Exchange Act, LSCI aided and abetted the violations.
e. LSCI and Lek Failed to Establish and Maintain a Supervisory System, Including
Written Supervisory Procedures, Reasonably Designed to Achieve Compliance with
Applicable Securities Laws, Regulations, and Rules
LSCI and Lek Failed to Establish Adequate Supervisory Procedures, Including WSPs
199. PHLX members are required to establish, maintain, and enforce WSPs
reasonably designed to achieve compliance with applicable securities laws, regulations,and rules. PHLX members are further required to tailor their WSPs to supervise the typesof business in which it engages.23
200. LSCI and Lek failed to satisfy this obligation by including genericlanguage in the WSPs not applicable to the Firm’s actual business.
201. The Firm’s WSPs also failed to address key business lines, such as its
market access business. Although the Firm provided market access to customers,
including Avalon, the Firm’s WSPs did not provide for sufficient reviews of trading
activity by market access customers, did not provide for supervision of accounts withmaster-sub account arrangements, and did not include monitoring for various forms ofpotentially manipulative activity by customers, including but not limited to layering. In
addition, the Firm’s WSPs did not provide for monitoring the use of, and payments to,putative foreign finders.
23

PHLX Rule 748(h) as of November 23, 2012. Prior to that date, this was numbered as PHLX Rule 748(g).

30202. Further, LSCI and Lek failed to establish adequate supervisory procedures
to review for potentially manipulative trading activity and, instead, relied upon manual
reviews of accounts in real-time by Lek and other desk supervisors, as well as firm
“gateways” that contained “certain compliance checks, fat finger checks, or credit
checks,” and post-trade tracking reports. But there were no gateway checks, and no
exception reports, for layering prior to February 1, 2013.
203. The Firm also relied upon so-called wash sale exception reports, which
failed to identify potential or actual wash sales that were separately identified inregulatory inquiries. In fact, both LSCI and Lek acknowledged that, prior to January
2013, the Firm could not determine which trades on the wash sale exception reports wereactually wash sales.
204. Further, the Firm had no controls specific to layering until it applied alimited “Q6” layering control on February 1, 2013. The Q6 control only applied to someaccounts at LSCI. Further, the control was limited to one parameter: a comparison of thenumbers of orders placed on one side of the market relative to the other side of themarket. If the difference exceeded a pre-set threshold, the order causing the threshold to
be exceeded would not go through.
205. As described above, however, the Firm intentionally undercut theeffectiveness of the limited Q6 control with respect to the Avalon account by disclosing
the nature of the controls to Avalon and by subsequently loosening the Q6 control afterNF objected to the limits.
206. Thus, the Q6 control failed to provide effective review of potentiallymanipulative trading. Avalon’s layering activity continued and, in fact, increased
throughout the relevant period.
LSCI and Lek Failed to Maintain Adequate Supervisory Procedures, Including WSPs
207. Lek supervised all firm employees during the relevant period. As LSCI’s
CEO and CCO, he was responsible for establishing, maintaining, and enforcing LSCI’s
supervisory system and WSPs. Lek purportedly delegated responsibility for updating the
Firm’s WSPs to AS.
208. AS, however, failed to review all of the WSPs, and was unfamiliar withvarious aspects of the supervisory reviews and tools referenced in the WSPs, such as theexistence or use of a Daily Transaction Report mentioned in the “Prohibited
Transactions” section.
209. The WSPs also failed to identify the designated principal responsible forparticular supervisory reviews described in the document and to maintain acomprehensive list that identified the designated supervisor for each supervisory review
specified in the WSPs.
31

210. LSCI’s and Lek’s failure to maintain an adequate supervisory system isalso revealed by inconsistencies between Firm practices and the procedures described in
the WSPs. For example, particular reviews were not conducted as frequently as was
specified in the WSPs.
211. Other sections of the WSPs contained errors acknowledged by LSCI orwere inadequate:(a)Prior to 2012, the “SEC 15c3-5 (Market Access Rule) and Firm Trading Systems”
section contained errors concerning trading limits and “fat finger” controls.

(b)

The “Sharing Commissions or Fees with Non-Registered Persons” section failed
to address issues/reviews pertaining to non-registered foreign finders who receive
transaction-based compensation.

(c)

The “Hiring Procedures” section failed to include any requirements to confirm thecitizenship of potential foreign finders and failed to identify the principal
responsible for conducting pre-hiring investigations of new employees.

(d)The “CRD Electronic Filings” section failed to specify the person responsible for
ensuring the accuracy of information filed in the Central Registration Depository.

(e)

The “Regulatory Requests and Inquiries” section did not provide for a clear
supervisory system to ensure responses were timely, complete and accurate.

(f)

The Firm’s WSPs required review of electronic mail, but did not specify adesignated principal with responsibility to do so. Further, the frequency of such
reviews inconsistently referred to both daily and monthly reviews. Moreover, themethodology specified impractical steps, such as requiring employees to provide
hard copies of outgoing e-mails to the reviewer, while incoming emails were
electronically maintained on the reviewer’s terminal for purposes of review.

LSCI and Lek Failed to Enforce Its Supervisory Procedures, Including WSPs
212. LSCI and Lek also failed to enforce the WSPs that it had in place. The Firm’s
WSPs required annual certifications pertaining to outside business activities and accounts, andadherence to the Firm’s electronic communications policy. The Firm did not obtain executed
certifications for Pustelnik and AL for 2011 and 2012.
213. Further, LSCI and Lek were aware of the use of personal email accounts used for
Firm business by Pustelnik and SVP, contrary to Firm policy, but failed to review suchcorrespondence and take meaningful steps to prevent further violations.

32

LSCI and Lek Failed to Reasonably Supervise the Activities of Associated Persons
214. PHLX members are required to have a system to supervise the activities of its
associated persons that is reasonably designed to achieve compliance with applicable securities
laws and regulations, and with applicable PHLX rules.
215. Because Pustelnik, AL, and SVP were employed by LSCI, they were associatedpersons of LSCI.
216. Pustelnik, AL, and SVP controlled the Avalon account that was used for
manipulative purposes for more than four years.
217. Despite knowledge of all the facts set forth herein, LSCI and Lek failed toestablish and maintain supervisory procedures and a system to supervise the activities ofassociated persons Pustelnik, AL and SVP that was reasonably designed to achieve compliancewith applicable securities laws and regulations, and with Exchange rules.
f. LSCI Failed to Establish, Document, and Maintain a System of Risk Management
Controls and Supervisory Procedures Specific to Equity Trading that Were
Reasonably Designed to Manage the Financial, Regulatory, or Other Risks of Its
Market Access Business; and Lek Caused Such Failures
218. On November 3, 2010, the SEC announced the adoption of Rule 15c3-5 – theMarket Access Rule – “to require that broker-dealers with market access ‘appropriately control
the risks associated with market access, so as not to jeopardize their own financial condition, thatof other market participants, the integrity of trading on the securities markets, and the stability of
the financial system.’”24
219. Rule 15c3-5 established specific requirements for broker-dealers with market
access, including that such firms “establish, document, and maintain a system of risk
management controls and supervisory procedures reasonably designed to manage the financial,
regulatory, or other risks” of its business.25
220. The Market Access Rule further specified the required elements for risk
management controls and supervisory procedures and mandated that the controls and procedures
be under the “direct and exclusive control” of the broker-dealer.26
221.

LSCI was required to comply with the Market Access Rule as of July 14, 2011.27

17 C.F.R. § 240.15c3-5; Risk Management Controls for Brokers or Dealers With Market Access, 75 Fed. Reg.
69792, 69792 (Nov. 15, 2010).
24

25

17 C.F.R. § 240.15c3-5(b).

26

17 C.F.R. § 240.15c3-5(c)-(d).

27See Exchange Act Release No. 34-64748 (June 27, 2011).

33

222. Consistent with the previously described inadequacies regarding to LSCI’s WSPs
and supervisory procedures, LSCI did not have in place risk management controls andsupervisory procedures mandated for broker-dealers by SEC Rule 15c3-5. In particular, LSCI
lacked controls and procedures to detect and prevent layering, spoofing, and cross-productmanipulation, and other potentially manipulative trading activity by its market access customers,
including the Avalon account. Instead, LSCI’s risk management controls were primarily focusedon credit and financial risks and not on other areas of regulatory compliance risk, i.e., detection
and prevention of manipulative trading.
223. As the Firm’s CEO and CCO ultimately responsible for supervising all employees
and the Firm’s supervisory system and controls, Lek was a cause of the Firm’s failure to comply
with SEC Rule 15c3-5 by negligently (or recklessly) failing to ensure the Firm had controls andprocedures reasonably designed to manage the financial, regulatory, or other risks of market
access, including reasonable controls and procedures to detect and prevent layering and othermanipulative trading activity.
224. Despite FINRA Staff’s communications with LSCI in 2012 about repeatedregulatory trading alerts of suspicious trading in the Avalon account involving, among otherthings, layering and wash sales, LSCI’s controls and procedures continued to fail to detect orprevent the manipulative activity. Further, Lek negligently (or recklessly) failed to implement
such controls and informed regulators that the terms used to describe such manipulative conduct,
including “layering” and “spoofing,” were “made up.” Notwithstanding regulatory inquiries,
Lek continued to question whether such conduct was manipulative or illegal.
225. Lek’s negligence (or recklessness) regarding 15c3-5 controls is consistent with his
previously described comments to a potential customer interested in layering, the Firm’s
reputation as a safe haven for layering, and Lek’s disregard of numerous red flags about
Pustelnik, SVP, AL, the Avalon account, and the layering reported therein. It is also consistent
with the substantial assistance he provided to Avalon, as described above, to aid and abet thelayering activity.
226. The Firm eventually adopted its Q6 layering risk control in February 2013
ostensibly to curtail layering activity. As described above, however, the Q6 controls were
circumvented by the disclosure to Avalon of the methodology employed and by relaxing the only
operative parameter at the request of Avalon.
227. Further, the Firm lacked systematic procedures for obtaining and maintaining
information about such customer accounts/sub-accounts, lacked information about the identities
of some sub-accounts, and had minimal information about other sub-accounts, which wasdecentralized and frequently maintained away from the firm’s systems on the personal electronic
accounts of SVP.
228. Moreover, the Firm failed to adequately document its controls and procedures forassuring that surveillance personnel receive immediate post-trade execution reports. Similarly,
the Firm failed to adequately document its system and procedures for regularly reviewing the34effectiveness of its risk management controls and supervisory procedures, for Rule 15c3-5
purposes, and to the extent they existed at all, such systems and procedures were inadequate, as
evidenced by the Firm’s failures to identify and address the aforementioned deficiencies in its
controls and procedures and the ongoing suspicious and manipulative activity that is the subjectof this action.
g. LSCI Failed to Establish, Document, and Maintain a System of Risk
Management Controls and Supervisory Procedures Specific to Options Trading thatthat were Reasonably Designed to Manage the Financial, Regulatory, or Other
Risks of Its Market Access Business229. During the Options Market Review Period, LSCI had no systems or WSPs
reasonably designed to detect or prevent cross-product manipulation.
230. The Firm’s WSPs section 12.13.3.4 on “Market Manipulation,” dated both
February 2012 and September 2013, and in effect during the Review Period, merely identified
the prohibition of a purchase or sale “designed to raise or lower the price of a security or to givethe appearance of trading for purposes of inducing others to buy and sell.” The only examples ofsuch prohibited manipulative activities explicitly referenced were marking the close or open,
prearranged trading, painting the tape, and wash sales.28 The Firm’s WSPs section 9.8.4 further
states: “[p]atterns of orders that are potentially manipulative (i.e., orders at the close) are to bereviewed by the supervisor for corrective action.”
231. Further, despite the previously referenced regulatory inquiries, the Firm’s WSPs
continued to lack provisions regarding surveillance for potential cross-product manipulation, andthe Firm continued to lack an electronic surveillance program to detect potential cross-productmanipulation. Thus, neither LSCI nor Lek took reasonable action to prevent and detect instancesof cross-product manipulation.
232. Additionally, there were no gateway checks, and no exception reports, forspoofing prior to February 1, 2013, when LSCI’s Q6 control was initiated to detect spoofing andlayering. However, even this system was limited, for it only applied to some accounts at LSCI.
233. The Firm’s system to detect spoofing was limited to a comparison of the numberof orders placed on one side of the market relative to the other side of the market. If thedifference between the numbers (the “delta”) exceeded a pre-set threshold, the order causing thethreshold to be exceeded would not go through.
234.
However, the system maintained by LSCI to surveil for activity that potentiallyconstituted spoofing was not designed to detect instances of spoofing where the initial order was

In subsequent versions of the WSPs, dated December 22, 2014 and later, this section had been renumbered, andadded the examples of matched trades, and “[c]irculating, or causing to be published any communication that
purports to report any transaction as a purchase or sale of any security unless the trader believes that the transaction
was a bona fide purchase or sale of the security.”28

35

cancelled prior to entering an order on the opposite side of the market. Thus, the system failed toprovide effective supervision.
235. LSCI failed to establish, document and maintain a system of risk management
controls, and to have in place appropriate regulatory risk management controls and supervisory
procedures, to detect or prevent cross-product manipulation and spoofing.
236. As the Firm’s CEO and CCO ultimately responsible for supervising all employees
and the Firm’s supervisory system and controls, Lek was a cause of the Firm’s failure to comply
with Rule 15c3-5 by negligently or recklessly failing to ensure the Firm had controls andprocedures reasonably designed to manage the financial, regulatory, or other risks of market
access, including reasonable controls and procedures to detect and prevent cross-productmanipulation and spoofing.
237. Lek’s negligence (or recklessness) regarding 15c3-5 controls is consistent with his
previously described comments to a potential customer interested in layering, the Firm’s
reputation as a safe haven for layering, and his disregard of numerous red flags about Pustelnik,
SVP, AL, the Avalon account, and the layering reported therein. It is also consistent with thesubstantial assistance he provided to Avalon, as described above, to aid and abet the layering
activity.
h. LSCI Failed to Know Its Customer
238. PHLX members are required to use reasonable diligence, in regard to the opening
and maintenance of every account, to know (and retain) the essential facts concerning every
customer and concerning the authority of each person acting on behalf of such customer.
239. LSCI failed to exercise reasonable diligence with respect to the opening andmaintenance of the Avalon account, given the additional regulatory risks arising from its history,
country of origin, and trading activity that was the subject of regulatory inquiries. Moreover,
LSCI failed to retain evidence of reviews of Avalon and other such accounts.
240. LSCI also failed to exercise reasonable diligence to investigate underlying
organizational documents and other information about the entities behind the Avalon structure
and related website information about Avalon. Such information revealed that one of the entities
constituting Avalon (Avalon FA) was incorporated in the Republic of Seychelles but was
precluded by its Articles of Association from conducting any business there, while its Articles
listed LSCI’s New York address as its own and its sole officer worked out of that office.
241. Other information revealed that Avalon FA’s alter ego, Avalon Fund, appeared tooperate an office in Kiev, Ukraine, but was incorporated in New Jersey.
242. Further, the sub-account trading agreements, referencing the names of both
entities, stated Avalon was a New York limited liability company. In addition, the website forthe putative foreign entity was in English, with a link to the website for the U.S. entity in
Russian.
36

243. Despite this information and these red flags, LSCI failed to exercise reasonablediligence to investigate the individuals behind the Avalon structure and its traders, the reasonsfor its master-sub account structure, and the terms of the sub-account agreements, which would
have revealed that Avalon was acting as an unregistered broker-dealer and that it was not entitledto the foreign broker exception.
244. Further, LSCI had no systematic procedures for obtaining and maintaining
information about the Avalon master account or sub-accounts, and lacked information about theidentities and backgrounds of certain sub-account traders and had minimal information aboutothers.
245.
Thus, LSCI failed to use reasonable diligence in bringing on Avalon and theindividuals behind that entity, failed to diligently investigate the reasons for the master-subaccount structure and the terms of the sub-account agreements, and failed to diligently
investigate the many red flags that arose concerning both the trading activity in the Avalon
account as well as its use as an unregistered broker-dealeri. LSCI Failed to Maintain and Supervise Electronic Communications
246. PHLX Rule 760 requires member firms to make, keep current, and preserve books
and records as prescribed by the Exchange Act. Section 17(a) of the Exchange Act and Rule17a-4(b)(4) thereunder specifically requires preservation of “all communications received and ...
sent.”
247. Section 2.16 of the Firm’s WSPs provides that communications with customers
are “permitted only through company-sponsored or alternative approved facilities” but fails to
address how the Firm would supervise for the use of personal email accounts for businesspurposes or communications with customers. Further, section 2.16.10 requires annual
certifications of its employee’s adherence to these provisions, but the Firm did not provide
signed forms from Pustelnik or AL for 2011 or 2012, and section 5.14.1.5 required the Firm to
conduct a review of LSCI electronic mail on a monthly basis, but did not specify the supervisor
who would do so.
248. LSCI was aware that business-related emails were sent or received by Pustelnik
and SVP through their personal accounts because LSCI officers were on such emails.
249. During the investigation of this matter, Pustelnik turned over approximately
23,595 emails sent to or from his personal email account that he used for business purposes, ofwhich approximately 18,273 emails were not captured or reviewed by LSCI in the ordinary
course of business.
250. Similarly, SVP turned over approximately 11,188 emails sent to or from her
personal email account(s) that she used for business purposes across the relevant period, of
which approximately 5,900 emails were not captured or reviewed by LSCI in the ordinary courseof business.
37251. For these and the reasons set forth above, the Firm’s supervisory system and its
WSPs regarding the supervision of electronic communications were inadequate, the Firm failed
to adequately capture and retain the electronic communications of its employees and independent
contractors, and failed to supervise and review those communications in accordance withapplicable regulatory rules and Firm procedures.
j. LSCI Failed to Maintain and Supervise CRD Records
252. PHLX Rule 604(b)29 requires members and associated persons to file Form U-4s
electronically with CRD, and requires the Form U-4 to be updated as required.
253. LSCI’s employee profiles on the Forms U-4 in CRD contained incomplete or outof-date information. LSCI did not request associated persons SVP, AL, or Pustelnik fill out
Annual Certifications for 2011 and failed to produce to FINRA any of the forms for 2012 for AL
and Pustelnik. The certifications include statements regarding outside business activities. Thus,
LSCI did not have current information to update CRD with respect to their outside businessactivities. For example, Pustelnik failed to disclose his outside business activity in“uafunds.com,” an entity controlled by him that provided a link on Avalon’s website to Avalon’s
daily trading blotter.
254. Further, there were errors in the Form U-4s. Pustelnik’s address on his form wasincorrect and AL’s form did not include any alternative spellings of his name, of which there
were many. Also, the forms for Pustelnik and AL did not indicate they were independent
contractors, while Lek maintained that they were. AL also disclosed to LSCI his employment
with “Avalon Fund Aktiv LLC,” a business incorporated in New Jersey, but it was reported in
CRD as “Avalon Fund” in Kiev, Russia [sic].
255. In addition, LSCI’s WSPs contained no provisions identifying the person
responsible for ensuring compliance with applicable rules and regulations regarding CRD
registration. Specifically, Section 4.1.1.3 of the WSPs fails to specify the person responsible toconduct pre-hiring investigations of new employees and Section 4.2.2 fails to specify the person
responsible for ensuring the accuracy of information filed in CRD.
256. Thus, LSCI failed to adequately maintain its employees’ CRD records, and failed
to establish, maintain and enforce a supervisory system reasonably designed to ensure theaccuracy of information submitted to CRD.

29

Effective June 17, 2012, PHLX Rule 604 was superseded by PHLX Rule 616. After the relevant period, effective
October 1, 2018, PHLX Rule 616 regarding Electronic Filing Requirements for Uniform Forms was replaced by
PHLX General 4 Regulation, Section 1. Nasdaq General Rule 4, Section 1.1250 is incorporated by reference into
PHLX General Rule 4, Section 1.

38

k. LSCI Failed to Enforce Supervisory Procedures Concerning Outside Business
Activities
257. On November 26, 2013, FINRA Staff requested copies of the Annual
Certification forms for LSCI employees Pustelnik, AL, and SVP for the years 2010-2013. LSCI
failed to provide the requested certifications for 2011 because it had failed to send the forms toPustelnik, AL, or SVP in 2011, although it sent the forms to numerous other employees. For
2012, LSCI provided a single form executed by SVP and, for 2013, forms executed by Pustelnik,
AL and SVP (notably, SVP’s 2013 form was executed after the FINRA request). During thisperiod, Pustelnik was engaged in various outside business activities, including Algo Design LP
and Algo Design LLC, and had several outside accounts. LSCI was also unable to produce any“Outside Business Activity Request” forms submitted by Pustelnik between 2010 and 2013, or
any evidence of reviews of his outside accounts for the same period.
258. Thus, LSCI failed to enforce its supervisory procedures, including its WSPs,
regarding outside business activities.
l. LSCI Failed to Comply Fully and Timely to Staff Requests for Information
259. LSCI was required to fully and timely comply with the Staff’s requests, pursuant
to PHLX Rule 960.2(b), for information in connection with its investigations in this matter,
including, among other things, requests to the Firm to provide electronic communications andother documents and information in writing.
260. During the relevant period, FINRA Staff issued requests pursuant to FINRA Rule8210 and analogous exchange rules for copies of “all electronic communications” for certain
time periods for certain LSCI employees. In its responses, LSCI unilaterally withheld fromproduction electronic communications and other documents through use of a Firm-controlled“electronic privilege screen” that automatically withheld emails or attachments that contained aterm on the Firm’s undisclosed search term list.
261. The Staff set forth its opposition to LSCI’s decision to unilaterally limit its
production and reiterated its requests. LSCI nonetheless continued to withhold responsive
documents purportedly containing terms on its list. In fact, LSCI stated at one point that it had
withheld 27,450 documents by use of its privilege screen. Moreover, despite repeated Staff
requests to do so, the Firm has failed to produce a privilege log to the Staff identifying the
documents unilaterally withheld.
262. In sum, despite repeated requests, the Firm has unilaterally withheld documentsfrom its productions to FINRA and has neither identified them nor provided a privilege log. In
so doing, the Firm has failed to fully and timely comply with the Staff’s requests, thereby
impeding the investigation of this matter.

39

FIRST CAUSE OF ACTION
Aiding and Abetting Manipulation in Equities and Options Trading
Prohibited Under Section 10(b) of the Exchange Act and Rule 10b-5
Thereunder, Section 9(a)(2) of the Exchange Act, and Section 17(a) of the Securities Act(Violation of PHLX Rule 707)
(LSCI and Lek)
263. As set forth above, Avalon, acting through its traders, knowingly or recklessly
engaged in manipulative trading in the Avalon account at LSCI during the relevant period.
264. In so doing, Avalon, through the use of the Avalon master account and its subaccounts at LSCI, in connection with the purchase or sale of securities, directly or indirectly, by
the use of a facility of a national securities exchange, knowingly or recklessly employed adevice, scheme or artifice to defraud, or engaged in an act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person, thereby violating Section 10(b)of the Exchange Act and Rule 10b-5 thereunder.
265. In addition, Avalon, directly or indirectly, by the use of the mails or any means or
instrumentality of interstate commerce, or of a facility of a national securities exchange, effected,
alone or with one or more persons, a series of transactions in securities creating actual orapparent active trading in such securities, or raising or depressing the price of such securities, forthe purpose of inducing the purchase or sale of such securities by others, in violation of Section
9(a)(2) of the Exchange Act.
266. Avalon also, through the use of the Avalon master account and its sub-accounts at
LSCI, in connection with the offer or sale of securities, directly or indirectly, by the use of anymeans or instruments of transportation or communication in interstate commerce or by use of themails, engaged in a transaction, practice, or course of business which operates or would operate
as a fraud or deceit upon the purchaser, thereby violating Section 17(a)(3) of the Securities Act
of 1933 (“Securities Act”).
267. As set forth above, Respondents LSCI and Lek knowingly or recklessly rendered
substantial assistance to Avalon in connection with the prohibited manipulative trading describedabove. In so doing, Respondents LSCI and Lek aided and abetted violations of Section 10(b) of
the Exchange Act and Rule 10b-5 thereunder, Section 9(a)(2) of the Exchange Act, and Section
17(a)(3) of the Securities Act, and thereby violated PHLX Rule 707.
SECOND CAUSE OF ACTION
Aiding and Abetting the Operation of an Unregistered Broker-Dealer
Prohibited Under Section 15(a)(1) of the Exchange Act(Violation of PHLX Rule 707)
(LSCI)
268. As set forth above, Avalon engaged in the activities of a broker-dealer operatingin the United States during the relevant period but failed to register with the SEC or FINRA as a
broker-dealer (or with any exchange).
40

269. In so doing, Avalon made use of the mails or a means or instrumentality ofinterstate commerce to effect transactions in securities without being duly registered, in violationof Section 15(a)(1) of the Exchange Act.
270. Respondent LSCI knowingly or recklessly rendered substantial assistance to
Avalon in connection with its operation as an unregistered broker-dealer. In so doing, LSCI
aided and abetted the violations, and thereby violated PHLX Rule 707.
THIRD CAUSE OF ACTION
Failure to Establish, Maintain, and Enforce Written Supervisory Procedures(Violations of PHLX Rules 707, 748, and 1025(a))(LSCI and Lek)
271. PHLX Rule 748(h)30 provides, in pertinent part, “Each member or member
organization shall establish, maintain, and enforce written supervisory procedures, and a system
for applying such procedures, to supervise the types of business(es) in which the member ormember organization engages in and to supervise the activities of all registered representatives,
employees, and associated persons. The written supervisory procedures and the system forapplying such procedures shall reasonably be expected to prevent and detect, insofar aspracticable, violations of the applicable securities laws and regulations, including the By-Laws
and Rules of the Exchange.”272. PHLX Rule 1025 similarly imposes supervision requirements for options trading,and PHLX Rule 1025(a) provides, in pertinent part, “The general partners or directors of eachmember organization that conducts a non-member customer business shall provide forappropriate supervisory control and shall designate a general partner or executive officer, whoshall be identified to the Exchange, to assume overall authority and responsibility for internal
supervision and control of the organization and compliance with securities laws and regulations.
This person … shall … (iii) Develop and implement written policies and procedures reasonably
designed to independently supervise the activities of accounts serviced by branch officemanagers, sales managers, regional/district sales managers or any person performing a similar
supervisory function.”273. As LSCI’s CEO and CCO, Lek was ultimately responsible for the Firm’s
compliance with supervision requirements.
274. As set forth above, during the relevant period LSCI and Lek failed to establish
required WSPs in numerous ways, including the failure to tailor the procedures to LSCI’s
business and to include sufficient procedures for the Firm’s market access business.
275. Further, as set forth above, during the relevant period LSCI and Lek failed tomaintain required WSPs in numerous ways, including assigning a responsible person who wasinsufficiently informed to perform his duties and by maintaining WSPs that were inadequate,
contained errors, or were at variance with steps actually performed.
30

As noted previously, Rule 748(g) was renumbered as Rule 748(h) effective November 23, 2012.

41276. In addition, as set forth above, during the relevant period LSCI and Lek failed to
enforce the Firm’s WSPs, including its procedures pertaining to outside business activities andaccounts and adherence to the Firm’s electronic communications policy.
277.

In so doing, LSCI and Lek violated PHLX Rules 707, 748, and 1025(a).
FOURTH CAUSE OF ACTION
Failure to Establish and Maintain a Reasonable Supervisory System(Violations of PHLX Rules 707, 748, and 1025(a))(LSCI and Lek)

278. PHLX Rule 748(h) provides, in pertinent part, “Each member or member
organization shall establish, maintain, and enforce written supervisory procedures, and a system
for applying such procedures, to supervise the types of business(es) in which the member ormember organization engages in and to supervise the activities of all registered representatives,
employees, and associated persons. The written supervisory procedures and the system forapplying such procedures shall reasonably be expected to prevent and detect, insofar aspracticable, violations of the applicable securities laws and regulations, including the By-Laws
and Rules of the Exchange.”279. PHLX Rule 1025 similarly imposes supervision requirements for options trading,and PHLX Rule 1025(a) provides, in pertinent part, “The general partners or directors of eachmember organization that conducts a non-member customer business shall provide forappropriate supervisory control and shall designate a general partner or executive officer, whoshall be identified to the Exchange, to assume overall authority and responsibility for internal
supervision and control of the organization and compliance with securities laws and regulations.”
280. As LSCI’s CEO and CCO, Lek was ultimately responsible for the Firm’s
compliance with supervision requirements.
281. As set forth above, during the relevant period LSCI and Lek failed to establish
and maintain the required system to supervise the activities of its registered representatives,
registered principals, and/or associated persons, including but not limited to Pustelnik, AL, and
SVP, notwithstanding numerous red flags suggesting closer supervision was warranted.
282.

By so doing, LSCI and Lek violated PHLX Rules 707, 748, and 1025(a).

FIFTH CAUSE OF ACTION
Market Access Rule Violations(Willful Violations of Section 15(c)(3) of Exchange Act and Rule 15c3-5 thereunder,
and Violations of PHLX Rules 707, 748, and 1025(a) (LSCI), andViolation of PHLX Rule 707 (Lek)283. Lek was ultimately responsible for the Firm’s risk management controls andsupervisory system as the Firm’s CEO and CCO.
42

284. LSCI and Lek failed to appropriately control the risks associated with providing
its customers with market access during the relevant period so as not to jeopardize the Firm’s andother market participants’ financial condition and the integrity of the trading on the securities
markets, as required by Rule 15c3-5 under Section 15(c)(3) of the Exchange Act.
285. LSCI and Lek failed to establish, document, and maintain a system of risk
management controls and supervisory procedures during the relevant period reasonably designed
to manage the financial, regulatory, and other risks of providing market access, as the term isdefined in Rule 15c3-5, and as required by Rule 15c3-5(b).
286. LSCI and Lek failed to ensure, as required by Rule 15c3-5(c), that LSCI had inplace appropriate regulatory risk management controls and supervisory procedures during therelevant period so as to: (i) prevent the entry of orders unless there was compliance with all
regulatory requirements; (ii) prevent the entry of orders if the customer or trader is restrictedfrom trading; (iii) restrict access to trading systems and technology to persons pre-approved andauthorized by LSCI; and (iv) assure appropriate surveillance personnel receive immediate posttrade execution reports that result from market access.
287. LSCI and Lek also failed to ensure, during the relevant period, that LSCI’s
regulatory risk management controls and supervisory procedures were under LSCI’s direct andexclusive control, as required by Rule 15c3-5(d). LSCI was not relieved of any of its obligations
to establish, document, and maintain a system of risk management controls and supervisory
procedures reasonably designed to manage the financial, regulatory, and other risks of market
access.
288. LSCI and Lek failed to establish, document and maintain a system for regularly
reviewing the effectiveness of the risk management controls and supervisory procedures during
the relevant period as required by Rule 15c3-5(e).
289. As detailed above, by failing to establish, document and maintain a system of risk
management controls and supervisory procedures reasonably designed to systematically manage
the regulatory and other risks of providing market access, LSCI willfully violated Section
15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder (for misconduct beginning July 14,2011) and thereby violated PHLX Rules 707, 748, and 1025(a).
290. Lek’s statements to potential investors and regulators regarding layering, as wellas his disregard of numerous red flags and inquiries about Avalon and its trading as he aided andabetted the misconduct, are consistent with, at the least, negligence or recklessness on his partwith respect to LSCI’s deficient market access controls.
291. By failing to ensure the Firm had controls and procedures reasonably designed to
manage the financial, regulatory, or other risks of market access, including reasonable controls
and procedures to detect and prevent layering and other manipulative trading activity, Lek was acause of the Firm’s willful violations of Exchange Act Section 15(c)(3) and Rule 15c3-5
thereunder, in violation of PHLX Rule 707.
43

SIXTH CAUSE OF ACTION
Failure to Know Your Customer(Violations of PHLX Rules 707, 746, 747, and 748)
(LSCI)
292. PHLX Rule 746 requires PHLX members, such as LSCI, to use due diligence tolearn the essential facts relative to every customer and to every account accepted by theorganization.
293. PHLX Rule 747 requires that PHLX members, such as LSCI, know (and retain)
the essential facts concerning every customer.
294. Beginning December 26, 2012 through the end of the relevant period, LSCI failed
to know its customer, Avalon, by failing to use reasonable diligence to understand the origins of
Avalon and the individuals behind it, as well as those who were trading in or through its masteraccount and sub-accounts, and the reasons for its structure and the terms of its operation, both in
the course of onboarding Avalon and in the maintenance of its account.
295.

By so doing, LSCI violated PHLX Rules 707, 746, 747, and 748.

SEVENTH CAUSE OF ACTION
Failure to Make and Preserve Email Books and Records(Willful Violations of Section 17(a) of the Exchange Act and Rule 17a-4
thereunder and Violations of PHLX Rules 707, 748 and 760)
(LSCI)
296. PHLX Rule 760 requires member firms to make, keep current, and preserve books
and records as prescribed by the Exchange Act. Section 17(a) of the Exchange Act and Rule17a-4(b)(4) thereunder specifically requires preservation of “all communications received and ...
sent.”
297. Section 17(a) of the Exchange Act and Rule 17a-4(b)(4) thereunder require that
copies of communications received and sent (and any approvals thereof) by the member, broker
or dealer (including inter-office memoranda and communications) relating to its business, bepreserved for a period of not less than three years.
298. During the relevant period, LSCI employees and independent contractors wereusing non-firm (i.e. personal) email accounts to conduct LSCI business. The Firm was on noticeof such use as early as October 2010 and yet such use continued through at least December 2013.
The Firm did not preserve records of these communications.
299. In so doing, LSCI failed to adequately make and preserve email business records
of its employees and independent contractors, and thereby willfully violated Section 17(a) of the
Exchange Act and Rule 17a-4 thereunder, and also violated PHLX Rules 707, 748, and 760.

44

EIGHTH CAUSE OF ACTION
Failure to Supervise Electronic Communications(Violations of PHLX Rules 707 and 748)
(LSCI)
300. The Firm’s WSPs during the relevant period contained no provisions applicable toreviewing personal email accounts despite the fact its employees used personal email accounts to
conduct Firm business activities.
301. Further, review of the electronic communications provided by LSCI revealed that
employees were using personal email accounts to conduct Firm business; in fact, AS, identified
by Lek as the person responsible for Firm WSPs and supervision, received business-related
emails from employee personal email accounts yet failed to take steps to stop the practice.
302. Thus, LSCI failed to adequately supervise its employee’s electronic
communications as certain business-related emails were outside its purview, in violation of
PHLX Rules 707 and 748.
NINTH CAUSE OF ACTION
Improperly Paying Transaction-Based Compensation to an Unregistered Person(Violations of PHLX Rules 614(b) and 707)31(LSCI)
303. PHLX Rule 61332 requires all persons engaged in the securities business of amember who function as representatives to be registered. PHLX Rule 614(b) provides a limited
exception for nonregistered foreign persons (i.e., “foreign finders”) under certain conditions.
304. During the relevant period, by paying transaction-related compensation to an
unregistered person, namely, Pustelnik, when he was not eligible for foreign finder statusbecause he was a United States citizen and should have been duly registered with his Nasdaq
PHLX-employer firm, LSCI violated PHLX Rules 614(b) and 707.

After the relevant period, effective October 1, 2018, PHLX Rule 614 regarding Persons Exempt from Registration
was replaced by PHLX General 4 Regulation, Section 1. Nasdaq General Rule 4, Section 1.1230 is incorporated byreference into PHLX General Rule 4, Section 1.
31

After the relevant period, effective October 1, 2018, PHLX Rule 613 regarding Representative Registration was
replaced by PHLX General 4 Regulation, Section 1. Nasdaq General Rule 4, Section 1.1210 is incorporated byreference into PHLX General Rule 4, Section 1.
32

45

TENTH CAUSE OF ACTION
Failure to Comply Fully and Timely With Information Requests(Violations of PHLX Rules 707 and 960.2(b))33
305. FINRA Rule 8210 requires a member, person associated with a member, or
person subject to FINRA’s jurisdiction to timely comply fully with the Staff’s requests for
information in connection with an investigation, complaint, examination or proceeding,including requests to provide information orally, in writing, or electronically, and to provide
testimony. In addition, Rule 8210 permits the Staff to inspect and copy the books, records, andaccounts of such member or person toward that end. PHLX Rule 960.2(b) requires similarcompliance to the requests of the Exchange.
306. During the relevant period LSCI failed to fully and timely respond to the Staff’s
requests for information issued pursuant to FINRA Rule 8210 and various exchanges’ analogous
provisions. In particular—and to date—LSCI has failed to produce, despite repeated requests, allrequested emails in response to FINRA’s request and a privilege log for the thousands of
documents it has withheld.
307. In so doing, LSCI impeded the ability of FINRA and other regulators toinvestigate the serious misconduct at issue, thereby violating PHLX Rules 707 and 960.2(b).
B.

Respondents also consent to the imposition of the following sanctions:a)Imposing a permanent bar, in all capacities, against Samuel Fredrik Lek;b)

Imposing on Lek Securities Corporation sanctions of a Censure, a fine of$900,000, of which $69,230.77 shall be paid to PHLX,34 and the following equitablerelief and undertakings:
1) Business-Line Restrictions Regarding Foreign Intra-Day Tradinga. Definitions. For purposes herein, the following definitions shall apply:i.

33“Affiliates of the Firm.” The term “Affiliates of the Firm” includes
Lek Securities U.K. Limited (“Lek UK”), Lek Holdings Limited(“Lek Holdings”), and any parent, subsidiary, predecessor, successor,
entity owned or controlled by, or under common control with, theFirm, Lek UK, or Lek Holdings.

After the relevant period, effective January 2, 2018, PHLX Rule 960.2 was replaced by PHLX Rule 8210.

The remainder of the fine shall be paid to FINRA, NYSE, NYSE Arca, NYSE American, Nasdaq, BX, Cboe,
BZX, BYX, EDGA, EDGX, and ISE.
34

46

ii.

“Customer.” The term “Customer” shall mean any individual orentity holding an account at or trading through the Firm.

iii.

“Foreign Customer.” The term “Foreign Customer” shall mean any
Customer who is not a citizen, national, or resident of the UnitedStates or its territories, or is not incorporated or domiciled in the
United States or its territories. Any Foreign Customers of Affiliatesof the Firm shall be treated as Foreign Customers of the Firm.

iv.

“Intra-Day Trading.” The term “Intra-Day Trading” shall mean
executing, through an account at the Firm, more than five buy andmore than five sell orders in the same security (equity or option),
within a single day.

b. Business-Line Restrictions.
i.

The Firm is restricted for a period of three years from the date of theacceptance of this AWC, from having Foreign Customers thatengage in Intra-Day Trading. This shall be referred to as the“Foreign Intra-Day Trading Restriction.”

ii.

The Foreign Intra-Day Trading Restriction does not apply where theFirm engages in the following limited non-executing prime
brokerage functions: (1) post-execution clearing services; (2)settlement of securities; (3) custody services, including providing
technical services necessary to the provision of such custody
services; and (4) pre-execution credit checks conducted inconnection with (1)-(3) above.

iii.

Exceptions to the Foreign Intra-Day Trading Restriction.
Trading Exceptions. Subject to the Time-Out Period described in
section I.B.b)1)b.(iv) below, the Foreign Intra-Day Trading
Restriction shall not apply to the following types of trading byForeign Customers:(1) instances where the Monitor (defined below) determines that
the Intra-Day Trading was solely to unwind specific positions
in a single day due to news events, unique changes in market
conditions, or to correct a bona-fide error; provided,
however, that if the Firm or the Customer does not or cannot
provide the Monitor with requested information to determine
if the trading falls under this exception, then this exception
shall not apply;47

(2) instances where the Monitor determines that the Intra-Day
Trading was related to hedging that is not part of amanipulative or illegal strategy; provided, however, that if
the Firm or the Customer does not or cannot provide theMonitor with requested information to determine if the
trading falls under this exception, then this exception shallnot apply;(3) instances where the Monitor determines that the Intra-Day
Trading was related to stop loss orders that are not part of amanipulative or illegal strategy; provided, however, that if
the Firm or the Customer does not or cannot provide theMonitor with requested information to determine if the
trading falls under this exception, then this exception shallnot apply;
Foreign Customer Exceptions. The Foreign Intra-Day Trading
Restriction shall not apply to Foreign Customers in the following
categories:(4) institutional Customers with assets under management inexcess of $50 million; or(5) pension funds, broker dealers subject to comprehensive
regulation in their local jurisdiction, licensed banks, andentities that meet the definition of foreign financial
institutions under 26 U.S.C. §§ 1471(d)(4) and (d)(5) and thatare subject to comprehensive regulation in their local
jurisdiction by a regulatory body applicable to that type ofentity.
(iv)

Applicability of Exceptions.
(1) Existing Foreign Customers. From the date of entry of theForeign Intra-Day Trading Restriction until the later of (i)120 days, or (ii) 3 days after the Monitor’s first report (“TimeOut Period”), the Exceptions to the Foreign Intra-Day
Restriction set forth in section I.B.b)1)b.(iii)(2)-(5) above
shall be available only to existing Foreign Customers of theFirm. Attachment A hereto is a list of existing Foreign
Customers of the Firm.
(2) New Foreign Customers. At the end of the Time Out
Period, subject to review and approval by the Monitor, theFirm may begin excepting new Foreign Customers from the48

Foreign Intra-Day Trading Restriction pursuant to section
I.B.b)1)b.(iii)(2)-(5) above.
2) Requirement to Terminate Certain Foreign Customers. Foreign Customersof the Firm may be deemed Significant Compliance Risks and must be
terminated as following:a. Significant Compliance Risk Designation. A Foreign Customer is deemeda Significant Compliance Risk if:(i)

A Foreign Customer that does not fall within the exceptions in
section I.B.b)1)b.(iii)(4)-(5) above engages in Intra-Day Trading
twice in a 30-day period; or(ii)

A Foreign Customer, regardless of whether it falls within any
exception set forth in section I.B.b)1)(iii) above, engages inpotential manipulative trading or other market manipulation that isflagged by the Monitor, the SEC, FINRA, or another SelfRegulatory Organization (“SRO”).

b. Significant Compliance Risk Review. The Firm must cause the Monitor to
conduct a review of a Foreign Customer that has been deemed a Significant
Compliance Risk within 30 days of the Foreign Customer being so
designated, as set forth in section I.B.b)3)h. below.
c. Account Suspension. The Firm must suspend all trading by the Foreign
Customer that is deemed a Significant Compliance Risk during the
Significant Compliance Risk review if the Monitor so recommends, as set
forth in section I.B.b)3)h. below.
d. Termination.
(i)

The Firm must terminate a Foreign Customer that is deemed a
Significant Compliance Risk if, after the Significant Compliance
Risk review, the Monitor determines that the Foreign Customer
should be terminated.

(ii)

If the Firm or the Foreign Customer cannot or does not provide
information requested by the Monitor to conduct the Significant
Compliance Risk review, the Firm must terminate that Foreign
Customer, as set forth in section I.B.3)h. below.

3) Retention of Monitor. Within 30 days of the execution of this Offer ofSettlement, retain an Independent Compliance Monitor (the “Monitor”), notunacceptable to FINRA, for a period of three years, to conduct acomprehensive and ongoing review of the Firm concerning the areas and49subjects set forth below, and to carry out the tasks set forth herein. The Firm
may apply to FINRA for an extension of that deadline before it arrives, andupon a showing of good cause by the Firm, FINRA, in its sole discretion, may
grant such extension for a period of time it deems appropriate.
a. Terms and Payment of Monitor. The Monitor shall remain in place for aperiod of three years from the date of retention, provided, however, that if
the Firm fails to implement the Monitor’s recommendations and obtain the
Monitor’s certification of such implementation within that period, theMonitor will remain in place until the Firm complies with all
recommendations and the Monitor certifies that such recommendations havebeen implemented. The Firm shall be solely responsible for payment of theMonitor’s fees and expenses.
b. Independence of Monitor. The Firm shall require the Monitor to enter into
an agreement that provides that for the period of engagement and for aperiod of two years from completion of the engagement, the Monitor shallnot enter into any employment, consultant, attorney-client, auditing or otherprofessional relationship with the Firm or any of its present or former
affiliates, directors, officers, employees, or agents acting in those capacities.
The agreement will also provide that the Monitor will require that any firmwith which he/she is affiliated or of which he/she is a member, and any
person engaged to assist the Monitor in performance of his/her duties under
this Offer shall not, without prior written consent of FINRA, enter into any
employment, consultant, attorney-client, auditing or other professional
relationship with the Firm, or any of its present or former affiliates, directors,
officers, employees, or agents acting in those capacities for the period of theengagement and for a period of two years after the engagement.
c. Confirmation. Within three (3) business days after retaining the Monitor
pursuant to the above, the Firm must provide to FINRA a copy of theengagement letter detailing the Monitor’s responsibilities.
d. Cooperation. The Firm will cooperate fully with the Monitor, including
providing the Monitor with access to its files, books, records, and personnel(and the files, books, records, and personnel of Affiliates of the Firm), as
reasonably requested for the tasks set forth herein, and the Firm will obtainthe cooperation of its employees or other persons under its supervision orcontrol.
e. Account Information to Provide to Monitor. In order to facilitate theMonitor’s reviews and assessments that are to be performed hereunder, andin addition to any information required below, the Firm shall provide theMonitor with the following information and documents, within such time as
the Monitor reasonably requires and on an ongoing basis if and as requiredby the Monitor:
50

(i)

The identity and full legal name of every Customer, including theaccount holder and every person authorized by the Firm to trade in
the account.

(ii)

For each individual identified in subparagraph (i) above, a statementof whether the person is a citizen, national, or resident of the UnitedStates or its territories, and if so, identification of the location fromwhich the individual does business, and a copy of the driver’s
license or U.S. passport of such individual.

(iii)

If the individual identified in subparagraph (i) above is not a citizen,
national, or resident of the United States or its territories, astatement of the nationality, the location from which the individual
does business, and a copy of government-issued identification.

(iv)

For each entity identified in subparagraph (i) above, identificationof the names of the entity’s principals, and a statement of whether
it is incorporated or domiciled in the United States or its territories,
and if so, the state in which it is incorporated, and the state inwhich it has its principal place of business.

(v)

If the entity identified in subparagraph (i) above is not incorporated
or domiciled in the United States or its territories, identification of
the country in which it is incorporated, and the country in which it
has its principal place of business.

(vi)

Such other information as the Monitor requests.

f. Monitor’s Review, Assessment and Recommendations of the Firm’s
Compliance With Foreign Intra-Day Trading Restriction.
(i)

The Firm shall require the Monitor to review and assess on an
ongoing basis whether the Firm is complying with the Foreign IntraDay Trading Restriction. This shall include but not be limited torequiring the Monitor to: (i) review and assess all Intra-Day Trading
by Foreign Customers who are not excepted from such restriction
under section I.B.b)1)b.(iii)(2)-(5) and (iv) above; (ii) review andassess the sufficiency and reasonableness of the Firm’s systems,
policies, and procedures related to Intra-Day Trading by Foreign
Customers; (iii) review and assess the Firm’s compliance with theForeign Intra-day Trading Restriction; and (iv) conduct reviews andmake recommendations pursuant to the Significant Compliance Risk
provisions below.

51

(ii)

In order to facilitate the Monitor’s review required by this section
and the Significant Compliance Risk provisions below, the Firm
shall provide the Monitor with the following information for all
Intra-Day Trading by Foreign Customers who are not excepted fromsuch restriction under section I.B.b)1)b.(iii)(2)-(5) and (iv) above:(1) The date and time, security, quantity, price, and other details
requested by the Monitor concerning orders placed and trades
executed;(2) For orders and trades identified under subparagraph (1)above, the identity and location of the Customer, subaccount, or trader who entered each order and trade; and(3) Such other information as the Monitor requests, including but
not limited to the information described in section I.B.b)3)e.
above.

(iii)

The Firm shall make the information required by this section
I.B.b)3)f. available to the Monitor beginning no later than 30 days
after the date of entry of the Foreign Intra-Day Trading Restriction,and then every 30 days thereafter, or at such other intervals as the
Monitor may require.

(iv)

The Firm shall require the Monitor to perform and complete thereview, assessment and making of recommendations required by thissection within 120 days of the date of the Monitor’s appointment,
and again by the end of each 120-day period thereafter, for so long as
the Monitor is engaged.

(v)

The Firm shall require the Monitor to submit a report to the Firm andto FINRA on the review, assessment and recommendations requiredby this section within 120 days of the date of the Monitor’s
appointment, and again by the end of each 120-day period thereafter,
for so long as the Monitor is engaged. The report shall include
information concerning review and recommendations regarding
Intra-Day Trading by Foreign Customers.

g. Monitor’s Review, Assessment and Recommendations Regarding Firm
Supervision and Controls.
(i)

The Firm shall require the Monitor to review and assess thereasonableness of the Firm’s supervisory system, including its
WSPs, with respect to the areas described in paragraphs 271-282
above, and to recommend actions to be taken by the Firm to ensure
the reasonableness of its supervisory system, including its WSPs,
52

to address the risks associated with trading by Foreign Customers,
including trading through sub-accounts associated with Foreign
Customers;(ii)

The Firm shall require the Monitor to review and assess thereasonableness of the Firm’s supervisory system, including its
WSPs, with respect to customer identification procedures, and torecommend actions to be taken by the Firm to ensure thereasonableness of its supervisory system, including its WSPs, toaddress the risks associated with opening or maintaining accounts
for Foreign Customers, including sub-accounts associated with
Foreign Customers;(iii)

The Firm shall require the Monitor to review and assess thereasonableness of the Firm’s market access controls with respect tothe areas described in paragraphs 283-291 above, to include but
not limited to, credit limits, open order limits, and other pre-tradecontrols, as well as post-trade controls and reviews, and torecommend actions to be taken by the Firm to ensure thereasonableness of its market access controls to address the risks
associated with providing market access to Foreign Customers,
including market access through sub-accounts associated with
Foreign Customers.

(iv)

The Firm shall require the Monitor to submit a report to the Firm andto FINRA on the review, assessment, and recommendations requiredby this section within 120 days of the date of the Monitor’s
appointment, and again by the end of each 120-day period thereafter,
for so long as the Monitor is engaged. The report shall include
information concerning the Monitor’s review and recommendations
regarding supervision, customer identification procedures, andmarket access controls. The Firm may apply to FINRA for an
extension of the deadline for submitting a report before it arrives,and upon a showing of good cause by the Firm, FINRA, in its sole
discretion, may grant such extension for a period of time it deems
appropriate.

h. Monitor’s Review and Recommendations Concerning Significant
Compliance Risks and Termination.
(i)

The Firm shall require the Monitor to review, assess, and makerecommendations on an ongoing basis concerning the Firm’s
compliance with the Requirement to Terminate Certain Foreign
Customers provisions in section I.B.b)2) above. This shall include
but not be limited to requiring the Monitor to: (i) review and assess
the sufficiency and reasonableness of the Firm’s systems, policies,53and procedures for identifying Foreign Customers as Significant
Compliance Risks; (ii) review and assess the Firm’s compliance with
the Requirement to Terminate Certain Foreign Customer provisions
in section I.B.b)2) above; and (iii) conduct reviews and makerecommendations where a Foreign Customer has been designated a
Significant Compliance Risk.
(ii)

Where a Foreign Customer has been designated a Significant
Compliance Risk, the Firm shall require the Monitor to undertake
reviews and recommendations as follows:(1) Conduct a review within 30 days of the Foreign Customer
being designated a Significant Compliance Risk (“Significant
Compliance Risk Review”) to determine whether the Foreign
Customer has engaged in Intra-Day Trading not subject to the
exceptions set forth in section I.B.1)b.(iii) above or has
engaged in manipulative trading or other market
manipulation.
(2) Recommend whether the Firm should suspend all trading by
the Foreign Customer during the period of the Significant
Compliance Risk Review.
(3) Determine whether the Firm and the Foreign Customer
have provided all information requested to conduct the
Significant Compliance Risk Review.
(4) Determine whether the Foreign Customer has engaged in
Intra-Day Trading not subject to the exceptions set forth insection I.B.1)b.(iii) above or has engaged in manipulative
trading or other market manipulation.
(5) Make a recommendation regarding termination of theForeign Customer based upon the Monitor’s determinations
under subparagraphs (3) and (4) above and the Requirement
to Terminate Certain Foreign Customer provisions under
section I.B.b)2) above.

(iii)

The Firm shall require the Monitor to perform this review,
assessment, and making of recommendations on an ongoing basis forso long as the Monitor is engaged.

(iv)

The Firm shall require the Monitor to submit a report to the Firm and
FINRA on the review, assessment and recommendations required bythis section within 120 days of the date of the Monitor’s
appointment, and again by the end of each 120-day period thereafter,
54

for so long as the Monitor is engaged. The report shall include
information concerning the Monitor’s review and recommendations
regarding any Foreign Customers identified as Significant
Compliance Risks.
i. Monitor’s Review and Assessment of Whether Samuel F. Lek Has Any
Interest or Role in the Firm.
(i)

The Firm shall require that the Monitor review and assess the Firm’s
corporate governance structure, ownership, and management, so as
to determine whether Samuel F. Lek has any legal or beneficial
interest or role in the Firm.

(ii)

The Firm shall require the Monitor to perform and complete thisreview and assessment within 120 days of the date of the Monitor’s
appointment, and again by the end of each 120-day period thereafter,
for so long as the Monitor is engaged.

(iii)

The Firm shall require the Monitor to submit a report to the Firm and
FINRA on the review, assessment, and recommendations required bythis section within 120 days of the date of the Monitor’s
appointment, and again by the end of each 120-day period thereafter,
for so long as the Monitor is engaged.

j. Implementation of Recommendations.
(i)

Except as set forth in section I.B.3)j.(ii)-(vii) below, the Firm shallhave ninety (90) days from the date of receiving any
recommendations from the Monitor to adopt and implement such
recommendations. The Firm shall notify the Monitor and FINRA in
writing when each such recommendation has been implemented.

(ii)

Any recommendations that the Monitor makes regarding suspending
all trading by the Foreign Customer during a period of Significant
Compliance Risk Review must be implemented within one (1)business day of the Monitor’s recommendation.

(iii)

Any recommendations that the Monitor makes regarding terminationof a Foreign Customer must be implemented within two (2) businessdays of the Monitor’s recommendation.

(iv)

If the Firm considers any recommendation unduly burdensome,
impractical, or costly, or inconsistent with applicable law or
regulation, the Firm need not adopt that recommendation at thattime, but may submit in writing to the Monitor and FINRA within
fifteen (15) days of receiving the recommendation, an alternative55

policy, procedure, or system designed to achieve the same
objective or purpose. This provision shall not apply, however, torecommendations that the Monitor makes regarding (i) suspending
all trading by the Foreign Customer during a period of Significant
Compliance Risk Review, or (ii) termination of a Foreign
Customer.
(v)

If the Firm considers any recommendation relating to (i)suspending all trading by the Foreign Customer during a period of
Significant Compliance Risk Review, or (ii) termination of a
Foreign Customer, to be unduly burdensome, impractical, or
costly, or inconsistent with applicable law or regulation, the Firm
shall adopt the recommendation at that time, but may submit in
writing to the Monitor and FINRA within fifteen (15) days ofreceiving the recommendation, an alternative policy, procedure, orsystem designed to achieve the same objective or purpose.

(vi)

In the event that the Firm and the Monitor are unable to agree onan acceptable alternative proposal under sections (iv) and (v)above, the Firm shall promptly notify FINRA. The Firm mustabide by the Monitor’s ultimate determination with respect to any
such disputes. Pending such ultimate determination, the Firm shallnot be required to implement any contested recommendation(s)except, as set forth above, recommendations regarding (i)suspending all trading by the Foreign Customer during a period of
Significant Compliance Risk Review, or (ii) termination of a
Foreign Customer.

(vii)

With respect to any recommendation that the Monitor determines
cannot reasonably be implemented within ninety (90) days after
receiving it, the Monitor may extend the time period for
implementation, so long as FINRA does not object.

k. Providing Information to FINRA and other SROs. For the period of theMonitor’s engagement, the Firm shall provide FINRA and other affected
SROs35 with any information reasonably requested by FINRA or the SROs
pertaining to the subject matter of this Offer of Settlement. The Firm shallrequire that the Monitor provide FINRA and other SROs with any
information that FINRA or the other SROs request regarding such matters,
including but not limited to the Monitor’s review, assessments,
recommendations, and any communications and interactions between the
Monitor and the Firm.

35

See SROs listed in Sec. I, para. 4, supra.

56

l. Requirements Hereunder Do Not Supplant Other Legal Requirements.
The prohibitions and obligations set forth herein do not supplant any
obligations that the Firm has under the law or under the rules of any selfregulatory organization or exchange of which the Firm is a member. No
determinations by the Monitor, and no provisions herein, shall preclude
FINRA or any self-regulatory organization from bringing actions against
Respondents.
m. Certification by the Firm. Within thirty (30) days after the date of
implementation of any recommendation herein, the Chief Executive Officerof the Firm shall certify to the Monitor and FINRA, in writing, compliancewith the undertaking(s) set forth above. The certification shall identify theundertaking(s), provide written evidence of compliance in the form of anarrative, and be supported by exhibits sufficient to demonstrate compliance.
FINRA may make reasonable requests for further evidence of compliance,
and the Firm agrees to provide such evidence.36
Additionally, acceptance of this AWC is conditioned upon acceptance of parallel
settlement agreements in related matters between Respondents and the following SROs: FINRA,
NYSE, NYSE Arca, NYSE American, Nasdaq, BX, Cboe, BZX, BYX, EDGA, EDGX, and ISE.
The Firm agrees to pay the monetary sanction upon notice that this AWC has been
accepted and that such payment is due and payable. The Firm has submitted a Payment
Information form showing the method by which it will pay the fine imposed.
The Firm 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 Firm understands that this settlement includes a finding that it willfully violated
Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder, and Section 17(a) of the

In determining the above sanctions, PHLX has taken into account the monetary sanctions imposed by the SEC in
its parallel action against the Firm and Samuel Lek for, inter alia, aiding and abetting fraudulent trading of Avalon
FA Ltd, Nathan Fayyer, and Serge Pustelnik, in violation of Sections 9(a)(2) and 10(b) of the Exchange Act of 1934
and Rule 10b-5 promulgated thereunder, and Section 17(a) of the Securities Act of 1933 (see S.E.C. v. Lek Secs.
Corp., No. 17 Civ. 1789 (DLC)(S.D.N.Y.)). To avoid regulatory duplication, the monetary sanctions herein are
imposed solely for violations of the Third through Tenth Causes of Action herein, not the First or Second, which
allege aiding and abetting activity similar to the allegations in the SEC action.
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Exchange Act and Rule 17a-4 thereunder. Pursuant to Article I(kk) of PHLX’s By-Laws, thismakes the Firm subject to a statutory disqualification with respect to membership.
Lek understands that if he is barred or suspended from associating with any PHLX
member, he becomes subject to a statutory disqualification as that term is defined in Section
3(a)(39) of the Securities Exchange Act of 1934, as amended. Accordingly, Lek may not be
associated with any PHLX member in any capacity, including clerical or ministerial functions,
during the period of the bar or suspension. (See PHLX Rule 8310 and IM-8310-1.)
The sanctions imposed herein shall be effective on a date set by Nasdaq staff. Pursuant
to IM-8310-3(e), a bar or expulsion shall become effective upon approval or acceptance of thisAWC.
II.
WAIVER OF PROCEDURAL RIGHTS
Respondents specifically and voluntarily waive the following rights granted under PHLX’s Codeof Procedure:A.

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

To be notified of the Formal Complaint and have the opportunity to answer the
allegations 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 PHLX Review Council and then to the U.S.
Securities and Exchange Commission and a U.S. Court of Appeals.

Further, Respondents specifically and voluntarily waive any right to claim bias or prejudgmentof the Chief Regulatory Officer, the PHLX Review Council, or any member of the PHLX
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.
Respondents further specifically and voluntarily waive any right to claim that a person violated
the ex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144,
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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.
III.
OTHER MATTERS
Respondents understand 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 PHLX 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 Respondents; andC.

If accepted:
1.

This AWC will become part of the Respondents’ 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.

Respondents 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. Respondents 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
in this provision affects the Respondents’ right to take legal or factual
positions in litigation or other legal proceedings in which PHLX is not a
party.

4.

Respondent LSCI may attach a Corrective Action Statement to this AWC
that is a statement of demonstrable corrective steps taken to prevent future
misconduct. Respondent understands that it may not deny the charges ormake any statement that is inconsistent with the AWC in this Statement.
This Statement does not constitute factual or legal findings by PHLX, nordoes it reflect the views of PHLX or its staff.

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