NASD Charges Firm, Execs with Trading Ahead of Research and Short Sale Violations
Washington, DC — NASD announced today that it charged Metro Trading, Inc., of Deerfield Beach, FL, its current president, Christopher C. Tavares, and a former president, Alfred G. Marchetti, with trading ahead of a firm research report, short sale violations and failure to supervise.
In the complaint, NASD charged that in January and February of 2002, Metro Trading unlawfully traded ahead of a research report prepared by Tavares regarding Medi-Hut Co., Inc. (Nasdaq: MHUT). Also during this period, Tavares was investigating Medi Hut’s business activities in anticipation of publishing a research report on the company. NASD found that Metro Trading’s proprietary market making account actively engaged in short selling of Medi Hut stock just prior to releasing Tavares’s negative research report. The firm established a short position by submitting orders through ECNs at a time when Metro Trading’s published quotations were unrelated to the contemporaneous market for Medi Hut shares. In addition, Tavares sold short Medi Hut shares in his personal accounts before he disseminated the negative research report.
During its investigation, NASD determined that Marchetti actively executed short sale transactions in Medi Hut on behalf of Metro Trading knowing that Tavares’s negative research report was in process and close to publication. Metro Trading failed to make affirmative determinations of the availability of Medi Hut securities for borrowing prior to executing the short sales on behalf of its proprietary market making account. Given the facts and circumstances surrounding the firm’s proprietary short sales, NASD alleged that the transactions were not for bona fide market making purposes and subject to the affirmative determination rule. NASD’s affirmative determination rule requires that members ascertain and memorialize that it has the ability to borrow or provide the securities for delivery by settlement date prior to execution of the short sale transaction. Bona fide market making transactions are exempt from this requirement.
Metro Trading, Tavares, and Marchetti are also charged with supervisory failures including: failing to establish, maintain and enforce written supervisory procedures, and failing to supervise.
Under NASD Rules, the individuals and the firm named in the complaint can file a response and request a hearing before an NASD Regulation disciplinary panel. Possible sanctions include a fine, suspension, bar or expulsion from the NASD.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999 or by sending an e-mail through NASD’s Web Site at www.nasd.com.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web Site at www.nasd.com.