## Facts

- Wedbush Securities, Inc. (Wedbush) was an SEC-registered broker-dealer (and also registered as an investment adviser) headquartered in Los Angeles, California.
- Timary Delorme was a registered representative associated with Wedbush.
- Over multiple years, Delorme engaged in manipulative trading activity involving low-priced securities (penny stocks).
- In late 2012 and early 2013, Delorme’s supervisors at Wedbush received several warnings suggesting possible securities fraud and market manipulation connected to Delorme’s activity, including:
  - An email describing Delorme’s role in fraudulent penny-stock transactions.
  - Two FINRA customer-arbitration complaints alleging serious misconduct tied to investments in the same penny-stock issuers.
  - A FINRA inquiry into Delorme’s personal trading in one of the penny-stock issuers.
  - A separate FINRA inquiry into the allegations raised in the customer arbitrations.
- Despite these warnings, Wedbush continued to allow Delorme to place trades for customers.
- The SEC found Wedbush lacked a clear process for recognizing, escalating, investigating, and resolving red flags of potential market manipulation reflected in emails, arbitrations, and regulatory inquiries.
- The SEC instituted administrative (and cease-and-desist) proceedings against Wedbush under Exchange Act § 15(b). Wedbush resolved the matter by submitting an Offer of Settlement on a neither-admit-nor-deny basis (admitting jurisdiction).

## Issues

1. Whether Wedbush failed reasonably to supervise Delorme, with a view to preventing violations of the federal securities laws, in light of repeated red flags suggesting penny-stock manipulation and Wedbush’s inadequate follow-up.

## Decision

- The SEC found that Wedbush failed reasonably to supervise Delorme with a view to preventing and detecting violations of the federal securities laws, within the meaning of Exchange Act § 15(b)(4)(E).
- The SEC ordered Wedbush to cease and desist from committing or causing violations and any future violations of Exchange Act § 15(b)(4)(E).
- The SEC censured Wedbush.
- The SEC ordered Wedbush to pay monetary relief, including disgorgement and prejudgment interest, and a civil money penalty (amounts specified in the order).
- The SEC required undertakings, including retaining an independent compliance consultant to review supervisory policies and procedures related to low-priced securities and market-manipulation risks, implementing recommendations (or acceptable alternatives), and reporting to SEC staff on remediation.

## Legal Principles

- A broker-dealer must reasonably supervise associated persons with a view to preventing violations of the federal securities laws. Exchange Act § 15(b)(4)(E).
- “Reasonable supervision” requires (i) supervisory procedures reasonably designed to prevent and detect misconduct and (ii) a system that actually carries those procedures into practice.
- When a firm receives credible warning signs of possible fraud or manipulation—such as internal communications describing wrongdoing, customer arbitration claims raising serious allegations, and inquiries by FINRA—the firm must respond promptly, conduct a meaningful review, and take appropriate steps to limit risk (such as heightened supervision or trading restrictions).
- A firm’s supervisory program may be unreasonable when it lacks defined steps for identifying and escalating red flags, assigning responsibility for follow-up, documenting investigation results, and closing issues in a timely way.
- SEC administrative orders may impose remedial sanctions and undertakings in settled proceedings, even when the respondent neither admits nor denies the findings (other than jurisdiction).

## Conclusion

In Exchange Act Release No. 85309, the SEC concluded that Wedbush failed reasonably to supervise its registered representative, Timary Delorme, after receiving multiple warnings of possible penny-stock manipulation, and the SEC imposed a censure, monetary sanctions (including disgorgement, interest, and a civil penalty), and undertakings requiring outside review and upgrades to Wedbush’s supervisory controls and red-flag response process.


In the Matter of Wedbush Securities, Inc., Exchange Act Release No. 85309 (2019)