Interactive Brokers to pay $100,000 fine for allowing convicted felon to trade on its platform

Online trading major Interactive Brokers LLC has agreed to pay a $100,000 fine to resolve a New Jersey Bureau of Securities investigation related to a financial scam perpetrated on Interactive’s online trading platform. The Division of Consumer Affairs and the Bureau of Securities today made the relevant announcement.

The scam was run by three-time convicted financial felon Peter Zuck who used Interactive Brokers’s online trading platform in a scheme to defraud investors in his Osiris Fund Limited Partnership.

The Bureau has found that Zuck was able to open at least 16 accounts on the Interactive Brokers’ platform – two master accounts in his own name and eleven sub-accounts in the names of other individuals that were linked to the Zuck master account, as well as in the name of the Osiris Fund.

Zuck proceeded to trade the Osiris Fund account in a wildly speculative manner that exposed the investors’ savings to extraordinary market risk. After some early trading profits, Zuck and others working with him lost approximately $4.5 million trading in April and May 2010. Zuck and his co-defendants also defrauded investors by preparing and sending false investor account statements outside the Interactive platform, and by overstating the hedge fund’s net asset value to produce higher management fees and conceal losses. Later, Zuck withdrew $3.9 million in management fees to which he and his co-defendants were not entitled from other financial accounts at other financial institutions.

Interactive Brokers has been found to have failed to conduct a BASIC search on Zuck that would have revealed that he had been permanently barred by the National Futures Association (NFA) for failing to cooperate in an investigation, unrelated to the Osiris Fund matter, regarding his potential embezzlement of client funds.

Interactive’s failure to conduct the NFA BASIC search during the account opening process for Zuck and the Osiris-related accounts constitutes a failure to reasonably supervise under New Jersey’s Uniform Securities Law.

Under the Consent Order entered today, Interactive Brokers has agreed to:

• comply with the Securities Law;
• review and revise as necessary (to the extent it has not done so already) its policies and procedures regarding its client account opening procedures; and
• pay a civil penalty of $100,000.

“Interactive Brokers allowed a three-time convicted felon, who had been barred by the NFA, to open accounts and trade other people’s money on its platform where he recklessly traded millions of dollars,” Christopher W. Gerold, Chief of the New Jersey Bureau of Securities. “As this action evidences, online broker-dealers have a duty to supervise their platforms and when they don’t, they will be held accountable for their actions and inaction.”