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Credit Suisse Securities Fined $1.75 Million

On December 27, 2011, the Financial Industry Regulatory Authority (FINRA) fined Credit Suisse Securities, LLC, $1.75 million for violating Regulation SHO and failing to properly supervise short sales of securities and marking of sale orders.

By definition, a short sale is the selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller.  Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.  Regulation SHO requires a broker or dealer to have reasonable grounds to believe that the security could be borrowed and available for delivery before accepting or effecting a short sale order. Requiring firms to obtain and document this “locate” information before the short sale is entered reduces the number of potential failures to deliver in equity securities. In addition, Reg SHO requires a broker or dealer to mark sales of equity securities as long or short.

FINRA found that for at least the period from June 2006 through December 2010, Credit Suisse released millions of short sale orders to the market without reasonable grounds to believe that the securities could be borrowed and delivered.  In addition, Credit Suisse mismarked tens of thousands of sale orders in its trading systems. The mismarked orders included short sales that were mismarked as “long,” resulting in additional violations of Reg SHO’s locate requirement.

FINRA found that Credit Suisse’s supervisory framework over its equities trading business was not reasonably designed to achieve compliance with the requirements of Reg SHO and other securities laws, rules and regulations.  Due to the company’s supervisory failures, many violations were not detected or corrected until after FINRA’s investigation.