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NEW JERSEY ATTORNEY GENERAL'S OFFICE: Interactive Brokers Agrees to Pay New Jersey Bureau of Securities $100,000 Penalty to Settle Failure to Supervise Findings

By Press release submission | Feb 18, 2019

New Jersey Attorney General's Office issued the following announcement on Feb. 11.

The Division of Consumer Affairs and the Bureau of Securities (“the Bureau”) announced that online brokerage Interactive Brokers, LLC (Interactive) 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, 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.

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.

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.

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 (FINRA). 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.

Original source can be found here.

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