Interactive Brokers LLC (NASDAQ:IBKR) agreed to pay $100,000 in fines to settle multiple charges with the New Jersey’s Division of Consumer Affairs and the Bureau of Securities.
The civil penalty is related to allegations that the CFTC-registered broker did not adequately supervise its account opening procedures and permitted the former chief of a now-defunct hedge fund to trade even after he was banned from trading by NFA.
The watchdog said that Interactive’s supervisory breach occurred from June 2009 through November 2011.
As deduced from review of the settlement order, it appears that, during the relevant time, Interactive Brokers carried several accounts managed and controlled by Peter Zuck, who has a history of financial crime convictions. The order further states that Mr. Zuck used Interactive’s online trading platform in a fraudulent scheme that enticed 76 New Jersey residents to funnel $12 million into his hedge fund Osiris Partners Fund Limited, also known as Osiris Partners LLC.
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“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. 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,” Christopher W. Gerold, Chief of the New Jersey Bureau of Securities said.
Failure to identify Zuck’s criminal background
In 2009, Zuck assumed roles as a managing member and portfolio manager of the Osiris fund and admitted of his participation in a conspiracy to hide the investment losses and using the money from the fund for personal usage. He and his partners diverted $4 million from the hedge fund and took $3.9 million in fees to which they were not entitled, the order states.
This is not the first time for Zuck to be in trouble for his fraud schemes. He previously pleaded guilty to three different incidents of securities fraud in 1994, 1997 and 2002, and served five years in prison for the 1994 conviction.
The watchdog highlighted that the failure to identify the criminal background of Zuck demonstrated the broker’s insufficiency in policies and procedures for new accounts.
“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,” it said.