TD Securities to Pay $28.5M to Resolve Spoofing Allegations

TD Securities will pay over $28.5 million under agreements with various regulators over alleged civil and criminal violations related to fraudulent trading in the U.S. Treasurys market — specifically tens of billions of dollars in fraudulent “spoof” orders.

The broker-dealer has entered into a deferred prosecution agreement with the Justice Department, agreeing to pay $15.5 million in a criminal monetary penalty, forfeiture and victim compensation, to resolve federal criminal charges filed in New Jersey, the department announced Monday.

The charges concern a fraudulent scheme that involved hundreds of episodes of unlawful trading in the secondary market for U.S. Treasurys, according to the DOJ.

Separately, TD Securities agreed to pay a $6.5 million civil monetary penalty, about $400,000 in disgorgement and $135,000 in interest in an agreement with the Securities and Exchange Commission over the allegedly fraudulent trades. The disgorgement will be credited toward the company’s payment owed to the Justice Department, according to the SEC, which censured the broker-dealer.

In addition, the Financial Industry Regulatory Authority announced a separate, related settlement with TD Securities, which agreed to pay a roughly $6 million fine.

The case involves the former head of the TD Securities desk responsible for U.S. Treasurys, Jeyakumar Nadarajah, who was indicted on Nov. 7 in connection with the alleged scheme and is awaiting trial, according to the Justice Department.

“TD Securities placed hundreds of orders to buy and sell U.S. Treasurys that it never intended to execute, in order to deceive market participants and manipulate prices by creating the false appearance of supply and demand,” said Principal Deputy Assistant Attorney General Nicole M. Argentieri, head of the Justice Department’s criminal division. 

“Such efforts to profit through unlawful trading undermine public confidence in U.S. Treasurys markets and defraud other market participants. The criminal division is committed to ensuring the integrity of our financial markets and holding accountable those who engage in deceptive trading practices,” said Argentieri.

“The American public places trust in our financial institutions and relies on companies to be truthful and execute their obligations to traders in an ethical manner,” Eric Shen, inspector in charge of the U.S. Postal Inspection Service’s criminal investigations group.

 “The USPIS’ DOJ mail fraud team found there was a blatant violation of that trust, as this individual placed billions of dollars in spoof orders, distorting supply and demand and causing significant losses. These charges send a clear message that such deceptive practices will not be tolerated, and we are dedicated to protecting the integrity of our markets and the interests of honest investors,” Shen said.

Nadarajah engaged in a scheme to defraud in connection with the purchase and sale of Treasurys in the secondary market, according to DOJ, which cited court documents and admissions. Nadarajah placed hundreds of orders to buy and sell U.S. Treasurys, intending to cancel them before execution, the department alleges. 

The former Treasurys trading desk head did so in an attempt to profit by injecting false and misleading information concerning the existence of genuine supply and demand for Treasurys, deceiving other market participants and fraudulently inducing them to trade at prices, quantities and times they otherwise wouldn’t have, the department said.

As part of its deferred prosecution agreement, TD Securities, and U.S. parent TD Group US Holdings LLC have consented to continue to cooperate with the criminal division’s fraud section in any ongoing or future investigations. TD Securities and its parent must report evidence or allegations of conduct that may constitution a violation of U.S. anti-fraud, securities and commodities laws, DOJ said.

The department reached the resolution with TD Securities based on the nature and seriousness of the offense and TD Securities’ failure to voluntarily self-disclose the conduct to the department, DOJ said.

TD Securities received credit for cooperating with the department’s investigation and for remedial measures taken, including firing Nadarajah, and reviewing and continuing to enhance its compliance function, the department said.

The SEC, meanwhile, charged the broker-dealer with manipulating the U.S. Treasury cash securities market through spoofing and with failing to supervise the former head of its Treasurys trading desk, who the commission said made the illegal trades over 13 months.

From April 2018 through May 2019, the former TD Securities trader spoofed the U.S. Treasury cash securities by making the phony trades, which generated profits for the broker-dealer, the SEC alleges. The SEC also found the institution lacked adequate controls and failed to take reasonable steps to scrutinize the trader after receiving warnings of his potentially irregular trading activity.

“Manipulative and deceptive trading undermines the integrity of our markets,” Mark Cave, associate director in the SEC’s enforcement division, said. “Broker-dealers and other firms cannot ignore their employees’ manipulative conduct and must take meaningful steps to detect and prevent it. Today’s action results from our continuing commitment to combating illicit trading.”

TD Securities consented to entry of the SEC’s order finding that it violated an antifraud provision of federal securities laws and failed to reasonably supervise the trader. The company also was ordered to cease and desist from future violations of the relevant provision and was censured, in addition to being ordered to pay the civil penalty, disgorgement and interest, according to the commission.

TD said through a spokesperson Wednesday: “We take regulatory and employee conduct violations very seriously. We took action five years ago to report Mr. Nadarajah’s behavior to FINRA, terminated his employment and have since enhanced our monitoring and compliance capabilities. TD Securities values the trust our clients place in us and we are committed to meeting their ongoing needs.”

Credit: Chris Nicholls/Adobe Stock