GUEST BLOG [In]Securities: Jive Talkin': The SEC Busts a Braggin' Broker by Aegis Frumento Esq

June 24, 2022

a Guest Blog by

Jive Talkin': The SEC Busts a Braggin' Broker

Let's start with a basic truth: All ads lie. Ads for brokers too, only more so.

Some broker ads of the past lied with abandon. Back in the day, it was said that "When E.F. Hutton speaks, people listen," and everyone in the commercial would freeze to hear what E.F. Hutton said. See e.g.,  Later, Morgan Stanley Dean Witter put out whoppers for its fledgling online broker, Discover Brokerage. Like, for example, the one that portrayed a tow-truck driver who "retired" to a private island after "a few years" of online investing with Discover, but still drove a tow truck to "help people." See

Probably the most classic was John Houseman's turn for Smith Barney. In his deep and most patrician money-plated voice, Houseman intoned: "Smith Barney-they make money the old-fashioned way. They earn it." See

Of course, no one took those ads seriously. While everyone stopped to listen, Hutton pleaded guilty in 1985 to 2,000 counts of illegally overdrawing bank accounts to inflate the profits of its retail division. Smith Barney got in so much regulatory hot water over the years that a witty colleague of mine years ago, after spending one night too many trying to make excuses for it, took to roaming the halls doing John Houseman with a twist: "They make money the old-fashioned way. They steal it."

And even today, you can find brokers/advisers touting how they only make money when their customers make money-when we all know they make money enough to air prime-time commercials no matter what happens to their customers. I also hear them tout that they are "fiduciaries," as if that arcane distinction still matters. And I love the ones who brag of developing tailored portfolios for their clients, knowing that all major firms restrict their brokers to recommending only certain pre-approved models determined strictly by the customer's risk tolerance. 

Since everybody lies, how do we explain the recent settlement of an SEC administrative action by TradeZero America and its CEO, Daniel Pippitone? See "TradeZero, Meme Stocks, And High Dudgeon From The SEC  ( Blog / May 26, 2022" The firm paid $100,000 and he $25,000 to settle an SEC action charging them with violations of section 17(a)(2) and (3) of the Securities Act. They also had to promise not to do it again and to accept some remedial compliance consulting. All in all, it was the regulatory equivalent of a slap on the wrist, and if I were representing them I probably would have advised them to accept it too, just to be done with it. But still, it raises some questions, not the least of which is -- Why is the SEC wasting my tax money on things like this?

You'll recall that back in early 2021, a number of so-called meme stocks went berserk. See TradeZero's customers were among those bidding up the prices of the likes of AMC and GameStop. On the morning of January 28, 2021, TradeZero's clearing firm ordered it not to accept any buy orders for 3 meme stocks. TradeZero refused to implement that order, allowing its customers to trade freely in spite of its clearing firm. Finally, over 2 hours later, TradeZero relented and implemented the ban on buys, but 10 minutes later, the clearing firm lifted the ban and TradeZero's customers resumed trading as before. 

None of that is the basis of the SEC's charge. Rather, the complaint was that in the days that followed, TradeZero and Pippitone made more of it than they should have. But how much more, really? The settlement order notes that TradeZero made it sound like they had stood up to their clearing firm and forced it to back down, without mentioning that it too blocked trading for the 10 minutes before its clearing firm lifted its prohibition. Sure, TradeZero made itself look more heroic than it really was. All it did was disobey an instruction, but in an internet chat session, it said things like this:

  • "Our clearing firm tried to make us block you and we refused. After three hours on the phone they backed down."

  • It told the clearing broker "theres [sic] NO WAY we are shutting these off."

  • It promised "A leadership team that will go thermonuclear on clearing firms if they try to block your trades. Screw everyone that rolled over on this,"

TradeZero did refuse to comply with its clearing firm for over 2 hours, if not quite 3, so that's mostly true. It did say, in effect, that they weren't "shutting these [meme stock trades] off," so that's mostly true. And can we just take it as given that brokerage firms do not yet possess nuclear weapons, tactical or otherwise? 

The "lie" was that TradeZero didn't volunteer that it too had "rolled over." And yet, the 10-minute break in trading hardly seems consequential compared to its 2-hour refusal. OK, TradeZero's embattled stand wasn't quite Zelenskyan, or even Penceian, but it wasn't nothing. Even nothing gives people something to brag about these days, and these statements by TradeZero seem no worse than most brags.

Nor is even the SEC immune from unwarranted bragging. "This case sends a powerful message," said its assistant enforcement director in a press release, "that participants in our capital markets cannot exploit market turbulence to deceive customers." Deceive customers about what? Section 17(a) only prohibits deceptive actions "in the offer or sale of any security." In the offer or sale of what security did TradeZero make any of these statements? The SEC order doesn't say, because it can't. TradeZero set out to promote the firm, not any security being offered or sold by the firm. In other words, section 17(a) on its face does not apply.

On the other hand, FINRA Rule 2210(d)(1)(B) says, "No member may make any false, exaggerated, . . . or misleading statement or claim in any communication. . . or . . .  publish, circulate or distribute any communication that the member knows or has reason to know . . . is . . . misleading." The SEC doesn't trouble itself with FINRA Rule violations, and we don't know if there's a FINRA shoe yet to fall on TradeZero. However, I doubt whether Rule 2210 can reasonably apply to this scenario either, there being nothing in TradeZero's quoted statements that are material to any securities business that it would conduct for the benefit of its customers. 

The point is that neither the SEC nor FINRA has a dog in how TradeZero deals with its clearing firm. Those internal relationships are just not relevant to any investment decision a customer may make to buy or sell any particular security. TradeZero may as well brag about standing up to its landlord for all the difference it makes to its customers' decisions to buy one stock or another.

Every firm, in its advertising, makes itself out to be "better" than the next -- one listens better, another is smarter, a third works harder, a fourth talks plainer, a fifth won't make money at your expense, you name it. Those all are little lies, and we all know it. None of them is whiter or blacker than TradeZero bragging to be a badass to its clearing firm. Surely the regulators have bigger lies and brassier liars on which to target their limited resources than jive-talkin' brokers promoting their firms.


Aegis J. Frumento

380 Lexington Avenue
New York, NY 10168

Aegis Frumento co-heads the Financial Markets Practice of Stern Tannenbaum & Bell, New York City.  He represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations).  He has decades of experience representing SEC, CFTC and FINRA regulated firms and persons in regulatory enforcement investigations, hearings and lawsuits.  Drawing on his five years managing the Executive Financial Services Department of Morgan Stanley Smith Barney, Aegis has rare depth of experience in the securities and corporate governance laws affecting senior executives of public corporations.  When not litigating, Aegis enjoys working with new and existing broker-dealers, registered investment advisers, and private equity funds, covering all legal aspects from formation to capital raising. Those clients now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises, including the use of cryptosecurities to represent equity and debt interests. 

Aegis's long and distinguished career includes having been a Managing Director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.  He graduated from Harvard College in 1976 and New York University School of Law in 1979.  Aegis is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.  He is the current Chairman of the New York City Bar Association's standing Committee on Professional Responsibility.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.