New Jersey Bureau of Securities Sanctions Interactive Brokers LLC for Failure to Supervise

The New Jersey Bureau of Securities announced that it has resolved its investigation of the online broker dealer Interactive Brokers LLC of Greenwich, CT (“Interactive”) relating to fraudulent trading activity and securities fraud Interactive permitted on its online trading platform. Interactive has agreed to pay a $100,000 penalty to the Bureau of Securities and reform its opening account procedures for investors looking to sign up with the broker dealer in the future.

The New Jersey Bureau of Securities investigation of the broker dealer Interactive arose from the fraudulent trading activity conducted by a former investment advisor Peter Zuck of Middletown, NJ, through his hedge fund, Osiris Fund LP of Jersey City, NJ. The former investment advisor Zuck operated the hedge fund from April 2009 through December 2011. According to the New Jersey Bureau of Securities, while Zuck promoted his hedge fund as a conservative trading fund, in reality his team conducted the investment fund’s trading in a “wildly speculative” and aggressive manner. Zuck opened 16 investment advisory accounts at Interactive. Two of the investment accounts were in his own name, and one for the hedge fund. The New Jersey Bureau of Securities investigation revealed that, after initially seeing trading profits, the hedge fund lost $4.5 million in April – May 2010. Zuck and his cohorts concealed trading losses from fund investors by fabricating monthly account statements showing investors their holdings and a breakdown of the securities and trading activity in the account. These monthly account statements falsely hid trading losses and inflated the accounts’ values. Zuck was also accused of charging investors $3.9 million in management fees to which the fund was not entitled. There were approximately 76 investors in the Osiris Fund.

As a result of Zuck’s illegal conduct managing the Osiris Fund, the New Jersey Bureau of Securities sued Zuck and others in 2014 and obtained a judgment of $7.5 million. In 2017, Zuck pled guilty in federal court to charges of conspiracy to commit fraud and tax evasion. He was sentenced to a three-year prison term in connection with the securities fraud.

As for Interactive, the State’s investigation revealed that, prior to opening the Osiris Fund, Zuck already had a checkered past. In 1991, the National Futures Association (“NFA”) permanently barred Zuck from the derivatives industry. Between 1994 and 2002 he pled guilty to three separate instances of “fraud and other wrongful conduct.” Notwithstanding this background, Interactive permitted the investment advisor to operate and open the advisory accounts on its online trading platform. This conduct by the broker dealer enabled his fraudulent scheme. While Zuck did not disclose his past convictions and securities industry bar, Interactive could have discovered Zuck’s prior regulatory and criminal history if it had simply run a background check through the NFA’s online public information database, BASIC (“Background Affiliation Status Information Center,” similar to FINRA’s BrokerCheck). Interactive did conduct a background check of Zuck that did not disclose the past regulatory and criminal history; a search utilizing BASIC would have disclosed that information. As a result of this failure, Interactive agreed to a finding in a February 19, 2019 Consent Order that it failed to properly supervise. Interactive further agreed to a $100,000 fine and to review and revise, if necessary, its opening account procedures.

Lubiner, Schmidt & Palumbo is an experienced securities litigation and regulatory law firm. If you have questions or concerns regarding the handling of your brokerage account, contact Lubiner, Schmidt & Palumbo for a free consultation.

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