Interactive Brokers Agrees to Pay $100K Penalty to Settle Failure to Supervise Findings
The Division of Consumer Affairs and the Bureau of Securities today announced that online brokerage Interactive Brokers, LLC has agreed to pay a $100,000 civil penalty and, if necessary, to revise its account opening procedures to resolve a Bureau investigation related to a financial scam perpetrated on Interactive’s online trading platform.
The scam was perpetrated by three-time convicted financial felon Peter Zuck who used Interactive’s online trading platform in a scheme to defraud New Jersey residents and others who invested in his Osiris Fund Limited Partnership.
In the Consent Order entered today, the Bureau found that, despite his criminal and regulatory history, Zuck was able to open at least 16 accounts on the Interactive platform - two master accounts in his own name and eleven sub-accounts in the names of other individuals that were linked to the Zuck master account, as well as in the name of the Osiris Fund.
Officials say Zuck proceeded to trade the Osiris Fund account in a wildly speculative manner that exposed the investors’ savings to extraordinary market risk. After some early trading profits, Zuck and others working with him lost approximately $4.5 million trading in April and May 2010. Zuck and his co-defendants also defrauded investors by preparing and sending false investor account statements outside the Interactive platform, and by overstating the hedge fund’s net asset value to produce higher management fees and conceal losses.
As a result, Zuck fraudulently later withdrew $3.9 million in management fees to which he and his co-defendants were not entitled from other financial accounts at other financial institutions.
Although it conducted other automated checks into Zuck’s background, Interactive failed to conduct a commodities industry BASIC search on Zuck that would have revealed that he had been permanently barred by the National Futures Association (NFA) for failing to cooperate in an investigation, unrelated to the Osiris Fund matter, regarding his potential embezzlement of client funds.
In 2012, the Bureau filed an action in the Superior Court of New Jersey against Zuck, Osiris Fund, and others, alleging violations of the Securities Law, including fraud. Zuck with others implemented a volatile, high-risk strategy for the Osiris Fund that involved the leveraged purchase and sale of equity securities, option contracts, and futures. Zuck concealed the speculative nature of his trading from investors, misled investors about the extraordinary risks of an investment into the Osiris Fund, and concealed his criminal and regulatory history from those investors.
According to authorities, in 2014, the Bureau resolved its lawsuit against Zuck and the other defendants for, among other things, judgment in the amount of more than $7.5 million in restitution for defrauded Osiris Fund investors, civil monetary penalties, and disgorgement of ill-gotten gains.
Officials say on December 30, 2017, Richard W. Barry, the court-appointed receiver for the Osiris Fund and other related entities, commenced an arbitration on behalf of Osiris Fund against Interactive before the Financial Regulatory Authority. With the support of the Bureau of Securities, the Receiver successfully defeated a lawsuit filed by Interactive to avoid the arbitration. As a result, Interactive entered into an agreement resolving all of the Receiver's claims against Interactive.
Also in 2017, Zuck pleaded guilty to federal charges of conspiracy to commit wire fraud and tax evasion in connection with the scheme and was sentenced to three years in prison.
Interactive’s failure to conduct the NFA BASIC search during the account opening process for Zuck and the Osiris-related accounts constitutes a failure to reasonably supervise under New Jersey’s Uniform Securities Law.
“Broker-dealers have an obligation to reasonably supervise their trading platforms to prevent bad actors from accessing them,” said Paul Rodríguez, Acting Director of the Division of Consumer Affairs. “Had Interactive Brokers fulfilled that obligation, the accounts of this financial predator would have been rejected at inception or shut down.”
As a result of the Consent Order, Interactive agreed to:
comply with the Securities Law;
review and revise as necessary (to the extent it has not done so already) its policies and procedures regarding its client account opening procedures; and
pay a civil penalty of $100,000.
“Interactive Brokers allowed a three-time convicted felon, who had been barred by the NFA, to open accounts and trade other people’s money on its platform where he recklessly traded millions of dollars,” Christopher W. Gerold, Chief of the New Jersey Bureau of Securities. “As this action evidences, online broker-dealers have a duty to supervise their platforms and when they don’t, they will be held accountable for their actions and inaction.”
The Bureau is charged with protecting investors from investment fraud and regulating the securities industry in New Jersey. It is critical that investors "Check Before You Invest." Investors can obtain information, including the registration status and disciplinary history, of any financial professional doing business to or from New Jersey, by contacting the Bureau toll-free within New Jersey at 1-866-I-INVEST (1-866-446-8378) or from outside New Jersey at (973) 504-3600, or by visiting the Bureau's website at www.NJSecurities.gov. Investors can also contact the Bureau for assistance or to raise issues or complaints about New Jersey-based financial professionals or investments.