Frank McDonald, 55, says he’s a father of four, a Boise State fan and the bass player for Pat McDonald and the Tropical Cowboys, but he’s not a stock broker-dealer.
He is, he says, just a lender.
The difference is important, because federal securities regulators say he acted as an unregistered broker-dealer by allowing a Latvian trader to take advantage of McDonald’s access to securities trading to defraud unwitting investors. McDonald says he did no such thing.
The U.S. Securities and Exchange Commission took administrative enforcement action Thursday against McDonald and his defunct Zanshin Enterprises, along with three electronic trading firms in other states and seven of their executives. The SEC says they enabled investment fraud by a Latvian man by allowing him anonymous and unfiltered access to U.S. stock markets.
The SEC also filed a lawsuit Thursday against Igors Nagaicevs, 34, charging him with obtaining more than $850,000 in illegal profits by hacking into online brokerage accounts and manipulating more than 100 securities.
The agency said Nagaicevs would set up an account with a day-trading firm and arrange purchases and sales of certain thinly traded stocks, like Franklin Covey Co. or Sterling Bancorp. He would then break into customer accounts at large U.S. broker-dealers and use the accounts to buy the same stocks at higher prices, artificially raising the stock prices. After a stock’s price went up, he would sell the shares he bought through the day-trading firms.
McDonald and Zanshin are accused of receiving what’s called sponsored market access from a registered broker-dealer to participate in order taking and routing, extend credit to traders, handle customer funds and securities and access trading software and instructions. Nagaicevs took advantage of that access to steal from innocent investors, the SEC said.
McDonald denies the allegations. He said he is paid a percentage based on the money lent to traders and has never received any transaction-related fees. Nor did he or Zanshin have access to any trading software, he said.
“They’re saying I’m acting as a broker/dealer, and I’m not,” he said.
McDonald said he, as managing member of Zanshin Enterprises, was contacted in June 2009 by NWT Financial, a licensed broker-dealer in Washington state. He said NWT wanted to know if a dormant Zanshin account could be used by NWT traders, many of whom McDonald was lending to already. Customer-to-customer lending and other loans are allowed by law, according to federal regulations.
It was NWT’s responsibility to qualify those traders, make sure they complied with regulations, provide access to trade software and monitor trades, McDonald said.
Audits of NWT by the securities industry’s Financial Industry Regulatory Authority and the U.S. Securities and Exchange Commission looked into the firm’s accounts, including Zanshin’s, and found them in compliance, McDonald said.
McDonald said his company noticed that the Latvian’s transactions seemed abnormal and asked the brokerage to shut down his trading and report nine trades to the SEC.
Zanshin operated only as a lender, he said.
McDonald said he and Zanshin also do not meet the federal description of who must register as a broker/dealer.
The SEC offered to settle the lawsuit if the executives, including McDonald, paid a penalty fee of $35,000 each and admitted to acting as nonregistered broker/dealers. Two other executives of other companies named in the complaint for similar accusations have agreed. McDonald, who refused, is required to file an answer to the complaint within 20 days. A public hearing will be held in 30 to 60 days.
McDonald said he made a brief foray into day trading in 1997 when he lived in San Antonio but didn’t succeed. He then was approached by the broker about lending money to cover margins — money that is borrowed by traders to buy stocks. He has been lending to individual traders and trading firms ever since. He moved to Boise in 2002.
He said the Nagaicevs affair has spurred him to take extra precautions, such as securities account control agreements, to protect himself each time he lends money to traders.
“It’s obvious to any reasonable person who will look into this that we did not violate any SEC regulations regarding broker/dealers,” McDonald said.
Sandra Forester: 377-6464
