Los Angeles' biggest stockbrokerage ignored or didn't properly investigate warning signs that one of its brokers was pushing clients to invest in a pump-and-dump scheme, the Securities and Exchange Commission alleged.
The commission charged Wedbush Inc., based in downtown Los Angeles, with not properly supervising a broker who it alleges received kickbacks from the scheme's organizers in exchange for recommending that her clients invest in certain stocks and engage in trades aimed at manipulating their prices.
In a statement, SEC officials called broker Timary Delorme's conduct abusive and called Wedbush a "recidivist," noting that this is the commission's second action against the firm this year.
The charges are the latest in a spate of regulatory actions against Wedbush, which in the past six months has paid more than $1.5 million in fines and penalties related to allegations of misconduct from the SEC, the Financial Industry Regulatory Authority and other regulators.
Wedbush spokeswoman Natalie Svider said the firm would not comment on pending litigation.
The SEC alleged that Delorme, who had worked at Wedbush since 1976, was in cahoots with Izak Zirk Engelbrecht, an Ohio man who was sentenced last year to 12 years in federal prison after pleading guilty to securities fraud.
Their connection spanned from 2008 through 2014, the SEC alleged.
Engelbrecht engaged in so-called pump-and-dumps, in which parties work to inflate the price of a stock then sell shares before prices fall. He dealt in penny stocks, thinly traded securities of little-known companies.
No specific penny stocks were named in the SEC's order, which calls for a hearing on the matter and demands that Wedbush answer the commission's charges within 20 days. The order does not specify potential penalties.
Delorme, according to the SEC, bought shares of companies that were part of those schemes, which helped inflate the stock prices and made it appear that the stocks were actively traded. In exchange, Engelbrecht paid kickbacks to Delorme's husband, the SEC alleged.
In a separate settlement announced Tuesday, the SEC fined Delorme $50,000 and barred her from working in the securities industry. She did not admit wrongdoing.
Delorme said Tuesday that she cooperated with the federal investigation into Engelbrecht, was not charged with any criminal violations and received no kickbacks. She said her husband and some friends had investments with Engelbrecht's companies but said, "I never sold this to my clients."
Wedbush knew for more than a year that Delorme was connected to fraudulent stock transactions but allowed her practices to continue, the SEC alleged in its charges against the firm.
Specifically, the commission said a supervisor in 2012 reviewed an email from Delorme to a customer involved in the pump-and-dump scheme that outlined the customer's "efforts to assist in inflating the price of penny stocks."
Also that year, two customers filed complaints with the Financial Industry Regulatory Authority, an agency that regulates broker-dealers, alleging that Delorme and the firm made manipulative transactions in related securities.
The fact that Delorme's business with Engelbrecht was able to continue, according to the SEC, shows that the firm's supervisory systems "lacked any reasonable coherent structure" for investigating potential market manipulation and that there was "confusion as to whose responsibility it is to conduct investigations."
