Marking At The Close Drills Stockbroker

June 18, 2014

The stock market is alive and well. It is vibrant. It is competitive. It is a robust environment unfettered by manipulation. To hell with all the reformers and critics of the biz. There ain't nuthin' rigged here. Nothin' to see, folks. Keep movin'

A (marking at the) Close Case

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Nicholas Harris Shermeta submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Nicholas Harris Shermeta, Respondent (AWC 20070188016-01, June 10, 2014).

In 1993, Shermeta first registered with a FINRA member firm, and between January 2006 and October 2011, he was associated with Feltl & Company; and, thereafter, since October 2011, with Northland Securities, Inc. The AWC asserts that Shermeta had no prior relevant disciplinary history.

Elvis Has Left The Office

Prior to June 23, 2009, the AWC asserts that Shermeta had discussions with Feltl senior management about the firm's possible participation in an upcoming shelf offering of shares of Northern Oil & Gas ("NOG") (a Minnesota-based oil and gas production company). Early in the day of June 23, 2009, the AWC alleges that Shermeta handed a Feltl trader a sheet of paper with account numbers and quantities of NOG shares, and advised the trader he would call him later with trading instructions - probably near the close. The AWC informs us that after that exchange, "Shermeta then left the office."

Egging On NOG

About 19 minutes prior to the 4:00 p.m. ET close, the AWC asserts that Shermeta called from his cellphone and told his trader to place the orders "in like ten minutes at 2:50... or even wait" a few minutes later. He asked what the day's volume was so far and learned that it was 221,000. He then instructed the trader, ''Close the thing over six if you can."

The AWC asserts that for the trading day, NOG shares began trading slightly above $6 per share but slipped lower until such times as Shermeta's trades were placed. 

The AWC asserts that Shermeta's:

five buy orders totaled 37,000 shares and represented 58 percent of NOG's total trading volume during the last ten minutes of trading. The National Best Bid and Offer moved from $5.98 x $6.00, approximately eight minutes prior to the close, to $6.09 x $6.10 at the close.

Finally, the AWC explains that on June 24, 2009,the NOG offering was announced and on June 30th, it closed at a price below the June 23rd closing price. 

Deeming the above conduct "marking at the close," in willful violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and of FINRA Rules 2020 and 2010, in accordance with the terms of the AWC, FINRA imposed upon Shermeta a $25,000 fine and a 40-calendar-day suspension from association with any FINRA member in all capacities.

Bill Singer's Comment

For starters, why the hell did the AWC point out (and why did it matter) that Shermeta "left the office" after first speaking to the trader about the proposed NOG sales?  I'm assuming that FINRA wanted to make some point about the out-of-office status, but that point escapes me.  In furtherance of FINRA's ill-explained line-of-thought, the AWC adds that Shermeta placed the orders from his cellphone. And that matters why? If, on the other hand, he had placed the orders from a phone on his desk in the office, would that have not been a violation?

Finally, you know all that industry hype about how we have robust, competitive markets and don't believe all the crap about how over emphasized insider trading is, the myth of HFT manipulation, and the death of the old-boy-network of cronies doing each other favors? I mean, you've seen those apologists for the Street who insist that the markets aren't rigged. Well, consider how simple it was in this case for one, pretty much small-fry broker to close the thing over $6.  Yeah robust and competitive . . . not rigged at all.