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NASDAQ PHLX LLCLETTER OF ACCEPTANCE, WAIVER AND CONSENT
NO. 2018057172902
TO:Nasdaq PHLX LLC
c/o Department of Enforcement
Financial Industry Regulatory Authority (“FINRA”)

RE:

Sumo Capital, LLC, Respondent
Member Firm
CRD No. 146310

Pursuant to Rule 9216 of Nasdaq PHLX LLC (“Phlx”) Code of Procedure, 1 Sumo Capital, LLC(“Sumo” or the “Firm”) submits this Letter of Acceptance, Waiver and Consent (“AWC”) for thepurpose of proposing a settlement of the alleged rule violations described below. This AWC issubmitted on the condition that, if accepted, Phlx will not bring any future actions against theRespondent alleging violations based on the same factual findings described herein.
I.
ACCEPTANCE AND CONSENT
A.

Respondent hereby accepts and consents, without admitting or denying the findings, andsolely for the purposes of this proceeding and any other proceeding brought by or on
behalf of Phlx, or to which Phlx is a party, prior to a hearing and without an adjudicationof any issue of law or fact, to the entry of the following findings by Phlx:
BACKGROUND
The Firm became a member of Phlx in February 2009, and its registration remains ineffect. The Firm is a broker-dealer headquartered in Chicago, IL, employs approximately
55 registered individuals, and engages in market making and proprietary trading.
RELEVANT PRIOR DISCIPLINARY HISTORYThe Firm has relevant disciplinary history with respect to Regulation SHO Rule 200(f).
In a Decision issued on August 29, 2016, Cboe Exchange, Inc. accepted an Offer ofSettlement in which the Firm was censured and fined $10,000 for violating Regulation
SHO Rule 200(f) by maintaining a deficient aggregation unit plan that improperly listed
one individual in two separate aggregation units. The violative activity occurred from on
or about February 1, 2013 through on or about March 31, 2013.

1

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

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On August 23, 2017, the Firm was issued a summary fine of $3,500 under the NYSE
Arca, Inc. Minor Rule Violation Plan related to various supervisory violations.
Specifically, the Firm’s supervisory system was not reasonably designed to achievecompliance with certain securities laws and regulations, including Regulation SHO Rule200(f).
SUMMARY
This matter originated from a 2018 Cycle Examination of the Firm conducted by theTrading and Financial Compliance Examinations (“TFCE”) section of FINRA’s Market
Regulation Department, on behalf of Phlx and other options exchanges. The examination
reviewed for, among other things, the Firm’s compliance with Regulation SHO,promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), during themonth of April 2018 (the “Review Period”). The examination also reviewed the Firm’srelated supervisory systems, including its written supervisory procedures (“WSPs”), from
April 2018 through the present (the “Supervisory Review Period”).
This examination found that, as described further below, the Firm violated Regulation
SHO Rules 200(f) and (g). In addition, the Firm failed to establish, maintain, and enforce
WSPs, and systems for applying such procedures, that were reasonably designed to detectand prevent, insofar as applicable, violations of the applicable federal securities laws andregulations and Phlx rules, including Regulation SHO Rules 200(f) and (g), 203(b), and204(a), in violation of Phlx Rule 748, and subsequently Phlx Rule General 9, Section 20. 2
FACTS AND VIOLATIVE CONDUCT
1. During all relevant periods, Regulation SHO Rule 200(f) provided, in relevant part,that “Independent trading unit aggregation is available only if: (1) The broker ordealer has a written plan of organization that identifies each aggregation unit,
specifies its trading objective(s), and supports its independent identity; (2) Eachaggregation unit within the firm determines, at the time of each sale, its net position
for every security that it trades; (3) All traders in an aggregation unit pursue only theparticular trading objective(s) or strategy(s) of that aggregation unit and do notcoordinate that strategy with any other aggregation unit; and (4) Individual traders areassigned to only one aggregation unit at any time.”
2. During all relevant periods, Regulation SHO Rule 200(g) provided, in relevant part,that broker-dealers shall mark all sell orders of any equity security as “long,” “short,”
or “short exempt.” Sell orders may be marked “long” only if the seller is deemed toown the security being sold.
3. During all relevant periods, Regulation SHO Rule 203(b) provided, in relevant part,that a broker or dealer may not accept a short sale order in an equity security from2Phlx Rule 748 was superseded and replaced by Phlx Rule General 9, Section 20 as of February 3, 2020. The Firm
therefore violated Phlx Rule 748 from April 2018 through February 2, 2020, and Phlx Rule General 9, Section 20
from February 3, 2020 to the present.

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another person, or effect a short sale in an equity security for its own account, unlessthe broker or dealer has: (i) borrowed the security, or entered into a bona-fidearrangement to borrow the security; or (ii) reasonable grounds to believe that thesecurity can be borrowed so that it can be delivered on the date delivery is due; and(iii) documented compliance with this requirement.
4. During all relevant periods, Phlx Rule 748, and subsequently Phlx Rule General 9,
Section 20, required a member organization to establish, maintain, and enforce WSPs,
and a system of supervision for applying such procedures, that are reasonably
designed to supervise the types of businesses and activities in which they and theirassociated persons engage in order to achieve compliance with, and to prevent anddetect violations of, applicable securities laws and regulations, including the By-Laws
and Rules of Phlx. 3Regulation SHO
5. During the Review Period through the present date, the Firm’s Regulation SHO
Aggregation Unit Plan (“AGU Plan”) was deficient in that the Firm’s AGU Plan did
not reasonably identify each aggregation unit, specify each unit’s trading objective, orsupport its independent identity, and the Firm permitted an individual assigned to one
aggregation unit to supervise other aggregation units.
6. During the Review Period, the Firm mismarked one order out of 23 sampled orders in
one Regulation SHO aggregation unit as sell long rather than sell short.
7. The conduct described in paragraphs 5 and 6 constitute violations of Regulation SHO
Rules 200(f) and 200(g), respectively.
Supervision
8. During the Supervisory Review Period, the Firm’s WSPs regarding Regulation SHO
Rule 200(f) provided that annually or as aggregation units change, the Firm will
document a written plan of organization demonstrating that each aggregation unit isindependent and engaged in separate trading strategies without regard to otheraggregation units. The WSPs further stated that the Firm will establish and maintain
written records for each aggregation unit that include: the account number of eachtrading account designated as part of an aggregation unit; any permanent ortemporary changes in the accounts designated as part of an aggregation unit; the nameof each trader assigned to an aggregation unit; any transfer of securities between
aggregation units and the reasons for the transfer; and unusual activities that werereviewed.
9. During the Supervisory Review Period, the Firm failed to establish, maintain, andenforce WSPs, and a system of supervision for applying such procedures, that were3

As set forth above, Phlx Rule 748 was superseded and replaced by Phlx Rule General 9, Section 20 as of February
3, 2020.

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reasonably designed to prevent and detect violations of Regulation SHO Rule 200(f).
The Firm’s WSPs failed to identify the individual who was responsible for theirmaintenance and enforcement. Further, the Firm failed to enforce its WSPs because
the Firm’s AGU Plan did not demonstrate the independence of each aggregation unit,
did not, on a consistent basis, accurately identify the traders assigned to eachaggregation unit, did not reasonably identify the trading objective(s) of eachaggregation unit, and assigned one individual to an aggregation unit who was also
assigned to supervise other aggregation units.
10. During the Supervisory Review Period, the Firm’s WSPs regarding Regulation SHO
Rule 200(g) provided that each aggregation unit will conduct a review of sell ordertickets as requested by the Chief Compliance Officer (“CCO”) at least quarterly toidentify potentially mismarked orders. The review consisted of a random sample oforders, and any mismarked orders were to be referred to the CCO for further review.
The review was to be documented by “[c]hecklist, work papers or electronic
document(s) including the dates of the random review and the orders selected forsample.”
11. During the Supervisory Review Period, the Firm failed to establish, maintain, andenforce WSPs, and a system of supervision for applying such procedures, that werereasonably designed to prevent and detect violations of Regulation SHO Rule 200(g).
The Firm relied on its traders to conduct the actual order marking review, rather thanhave the review be performed by a supervisor. In addition, the Firm did not document
its supervisory reviews in accordance with its WSPs and did not provide adequate
evidence that such reviews had been conducted.
12. During the Supervisory Review Period, the Firm’s WSPs regarding Regulation SHO
Rule 203(b) provided that each aggregation unit will conduct a review of sell ordertickets as requested by the CCO at least quarterly to identify evidence of a locate, if itwould have been required. The review consisted of a random sample of orders, andany instances where a locate was not obtained were to be directed to the CCO for
further review. The CCO was to evidence her review by completing a checklist, or byother work papers.
13. During the Supervisory Review Period, the Firm failed to establish, maintain, andenforce WSPs, and a system of supervision for applying such procedures, that werereasonably designed to prevent and detect violations of Regulation SHO Rule 203(b).
The Firm relied on its traders to conduct the actual locate review, rather than have thereview be performed by a supervisor. In addition, the Firm did not document its
supervisory reviews in accordance with its WSPs and did not provide any evidence
that such reviews had been conducted.
14. During the Supervisory Review Period, the Firm’s WSPs regarding Regulation SHO
Rule 204(a) provided that each aggregation unit had a designated person responsible4  
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for closing out fail to deliver positions allocated by the Firm’s clearing firm. 4 The
designated person was to review the allocation notice and consult with the Risk
Manger to determine if the Firm qualified for an exception to the close-outprovisions. If the Firm did not qualify for an exception, the Risk Manager was to takesteps to close out the allocated position by buying the underlying security prior tomarket open and to confirm that the buy-in order(s) were executed. Documentation ofthe allocation and the Firm’s response was to be maintained by the Risk Manager.
15. During the Supervisory Review Period, the Firm failed to establish, maintain, andenforce WSPs, and a system of supervision for applying such procedures, that werereasonably designed to prevent and detect violations of Regulation SHO Rule 204(a).
The Firm relied on its traders to conduct the review for compliance, rather than havethe review be performed by a supervisor. In addition, the Firm’s WSPs reference anexception to the close-out requirement, although no such exception exists.
16. The conduct described in Paragraphs 8 through 15, above, constitute violations ofPhlx Rule 748 from April 2018 through February 2, 2020, and Phlx Rule General 9,Section 20(h) from February 3, 2020 to the present.
B.

The Firm also consents to the imposition of the following sanctions:a. A censure;b. A total monetary fine in the amount of $57,500, of which $21,250 ($10,000 for
the Regulation SHO violations and $11,250 for the supervisory violations) is
allocated to Phlx. 5c. An undertaking requiring the Firm to address the deficiencies discussed in thisLetter of Consent. Within 45 days of the date of this Letter of Consent, theFirm shall submit to the COMPLIANCE ASSISTANT, DEPARTMENT OFENFORCEMENT, 15200 Omega Drive, Suite 300, Rockville, MD 208503241, a written report, certified by a senior management Firm executive, toMarketRegulationComp@finra.org that provides the following information:
(i)
(ii)
(iii)

a reference to this matter;a representation that the Firm addressed each of the deficiencies
described above, including the specific measure or enhancements
taken to address those deficiencies; andthe date the measures or enhancements were implemented.

4
During all relevant periods, Regulation SHO Rule 204(a) provided, in relevant part, that if a participant of aregistered clearing agency has a fail to deliver position at a registered clearing agency in any equity security, theparticipant shall, within the prescribed time, close out the fail to deliver position by purchasing or borrowing
securities of like kind and quantity.
5
The balance of the fine shall be paid to Cboe Exchange, Inc.

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Respondent specifically and voluntarily waives any right to claim that it is unable to pay,
now or at any time hereafter, the monetary sanction imposed in this matter.
The sanctions imposed herein shall be effective on a date set by FINRA staff.
II.
WAIVER OF PROCEDURAL RIGHTSThe Firm specifically and voluntarily waives the following rights granted under Phlx’s Code ofProcedure:A.

To have a Formal Complaint issued specifying the allegations against the Firm;

B.

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

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

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

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

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III.
OTHER MATTERSThe Firm understands that:A.

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

B.

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

If accepted:

D.

1.

This AWC will become part of the Firm’s permanent disciplinary recordand may be considered in any future actions brought by Phlx or any otherregulator against the Respondent;

2.

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

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

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

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

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_____________
Date_________________________________
Sumo Capital, LLC
Respondent

By: ______________________________
   

Name: ____________________________
     
Title: _____________________________

Reviewed by:_______________________
John Sakhleh, Partner
Sidley Austin LLP
1501 K Street, N.W.
Washington, DC 20005

Accepted by Phlx: 

_________________
Date________________________________
Andy Hubbartt
Senior Counsel
Department of Enforcement
Signed on behalf of Phlx, by delegatedauthority from the Director of ODA

8