AG James Imposes $12.5 Million Penalty On Brokerage Firms For Martin Act Violations

NEW YORK – Attorney General Letitia James announced today that brokerage firms BGC FINANCIAL LP (“BGC”) and GFI SECURITIES LLC (“GFI”) have agreed to pay penalties totaling $12.5 million dollars to the Attorney General’s Office for their violations of the Martin Act. Both brokerage firms admitted that between January 1, 2014 and December 31, 2015, brokers of foreign exchange currency options (FX options) for emerging market currencies employed fraudulent practices to solicit and accept orders from New York traders to buy and sell FX options. Pursuant to their agreements, both firms must immediately implement remedial procedures, verified by an independent monitor who will report to the Attorney General’s Office.

“What happens on Wall Street impacts families on Main Street,” said Attorney General James. “That’s why maintaining the integrity of our financial markets is of paramount importance to my office. Today’s outcomes reflects this commitment to hold institutions that perpetrated fraud accountable for their misdeeds.” 

As set forth in separate agreements with BGC and GFI, the Attorney General’s investigation uncovered the posting of fake trades, bids, and offers by brokers of FX options, in order to ramp up interest from New York traders in largely illiquid emerging market currencies. An FX option is a financial instrument that confers the right to buy or sell a fixed amount of a specified currency at a specified exchange rate on or before a specific expiration date.  Globally, trading in FX options averages billions of dollars per day and trillions of dollars per year. Banks typically use multiple, competing brokers for their FX options trading. Bank traders can post bids or offers for FX options directly on the electronic platform of a brokerage firm, but primarily negotiate trades by calling, messaging, or chatting with an individual broker. Brokerage firms are compensated based on volume of executed trades, and individual brokers are paid commissions based on trade volume. Prior to 2013, the FX options market was largely unregulated. However, in the wake of the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act required brokers of FX options to retain records regarding their trading activity and communications. 

The Attorney General’s investigation revealed that between January 1, 2014 and December 31, 2015, brokers of FX options for emerging market currencies (EFX options) at BGC and GFI posted fake bids and offers on their electronic platforms for EFX options at a particular level to New York traders, when, in fact, no financial institution had actually bid or offered the option at that level. This practice, known as “flying” prices, was done to create a false appearance of greater liquidity in the EFX options market. During the subject two-year period, brokers at BGC and GFI “flew” hundreds of thousands of bids and offers for EFX options. 

Additionally, the Attorney General’s investigation revealed that between 2014 and 2015, EFX options brokers at BGC and GFI announced fake trades to New York traders that had never actually occurred. This practice is commonly referred to a “printing” a fake trade. Brokers at BGC and GFI “printed” fake trades in EFX options to New York-based traders over the phone, via instant message chats, and on their electronic platform. These non-existent trades were intended to deceive traders into believing that a trade had occurred at a particular level and to induce traders to enter into genuine “follow-on” trades for EFX options, i.e., trades at the level at which broker had falsely reported a trade, in order to generate commissions.

For their violations of the Martin Act and other statutes, BGC must pay $7.5 million in penalties and GFI must pay $5 million in penalties. The Attorney General’s Agreements, which also resolve potential criminal charges, also require BGC and GFI to affirmatively implement remedial policies and procedures, to provide training to their employees, and to retain an independent monitor for a period of 12 months, who will report its findings to the Attorney General. BGC and GFI are also prohibited from re-appointing brokers and managers formerly employed on their respective EFX options desks to any supervisory role or any role related to the brokering of FX options for a period of 5 years. The Agreements further require both firms to cooperate fully with the AG’s ongoing investigation.

Today’s resolutions are the result of a three-year investigation conducted by the Attorney General’s Criminal Enforcement and Financial Crimes Bureau, in conjunction with a parallel investigation by the CFTC. Previously, in September 2018, the Attorney General announced criminal convictions of brokerage firms TFS-ICAP LIMITED and TFS-ICAP LLC for posting fake trades in EFX options; both firms pleaded guilty and agreed to implement remedial policies and procedures, retain an independent monitor, and pay a fine of $1.15 million. 

The Attorney General thanks the CFTC for its valuable assistance in this investigation. Today, the CFTC announced orders finding that brokers at BGC and GFI engaged in intentionally deceptive conduct and requiring both companies to pay an additional $12.5 million in penalties to the CFTC and to implement remedial measures.

This case is being handled by Senior Counsel Gabriel Tapalaga and Assistant Attorney General Rebecca Reilly of the Criminal Enforcement and Financial Crimes Bureau. Assistance was provided by Legal Analyst Jacques Courbe, under the supervision of Supervising Analyst Paul Strocko. The Criminal Enforcement and Financial Crimes Bureau is led by Bureau Chief Stephanie Swenton and Deputy Bureau Chief Joseph D’Arrigo. The Bureau is overseen by Chief Deputy Attorney General for Criminal Justice Jose Maldonado.

Complex data analysis was provided by the Attorney General’s Research and Analytics Department’s Data Scientist Gautam Sisodia, and former Data Scientist Meredith McCarron, led by Director Jonathan Werberg and Deputy Director Megan Thorsfeldt. Information technology support was provided by Information Technology Specialist Gail Lysiak.

Investigator Brian Metz of the Attorney General’s Investigations Bureau led the criminal investigation, under the supervision of Supervising Investigator Michael Leahy and Deputy Chief John McManus. The Investigations Division is led by Chief Oliver Pu-Folkes.