Yes, I actually did read the complaint. And what concerns the SEC is that Tuco "allegedly" ran out of money to pay their operating expenses and started taking money out of the individual traders accounts to the tune of 3 million to pay for their expenses. I can't even count how many ways this is illegal. You may want to pretend this is no big deal, hey, what's a few dollars among friends. But it's actually a huge deal if it's true.
Now, I am not saying they did it and I'm certainly not trying to convict Tuco before their day in court. So as of now, these are simply allegations.
See, this is the problem with "some" sub LLC's. Here is how it works. Usually a large successful trader who currently is a member of an exchange and a BD, say Assent for example, decides he wants to start up a sub-LLC. Why would he want to do this you ask? Many reasons, number one being commission over-rides, number two being that he can create a sub account that when combined with a large pool of traders, can get a ridiculously low rate. He uses this low rate to save on his own trading commissions, and also to earn a mark up on anyone else he brings into his own sub-LLC. His overhead is usually very little as he usually just piggy backs the actual BD that he trades through, in this case, Assent.
It's actually a pretty sweet deal for him as he lowers his cost of doing business and earns a nice over-ride business. The problem is, many times the guy that does this is what we call, credit rich, cash poor. Meaning he really doesn't have the deep pockets that Assent has to absorb over-head costs and to absorb trading losses. He is kind of operating "on faith" so to speak that everything will go smoothly.
Well, there's the rub. Most of the time, things don't go smoothly. Sooner or later trouble strikes. And when it does, the sub-LLC owner, being cash poor, runs into trouble.
Now at this point any number of things can happen. He can try to siphon money out of the sub-LLC temporarily to pay expenses with the hopes of paying it back with either his over-rides or possibly his own trading profits. This ruse usually works if the problem can resolve itself quickly. Often times, that is not the case.
The logical next step is to hurry up and bring in as much new business as possible to earn more over-rides to make up for the cash short-fall. The downside to this solution is the recruiting of sub-par traders or high risk traders that blew out somewhere else and are desperate for a deal. So they are willing to come in on less then advantageous terms. Of course, bringing in bad traders to a sub-LLC already on the brink is not going to make things better, only add more risk.
Another possible solution is for the sub-LLC owner to try to trade his way out of this predicament. The downsides to this are obvious as any losses will just further sink the ship. The sub-LLC owner at this point is in a situation very much like that of a lending institution who has a lot of bad loans on their books but can't turn to the fed for liquidity if they are not a bank. The sub-LLC owner has no one to turn to as no will be the lender of last resort, including the BD itself.
We all can see the number of ways this can go bad and really fast at that. I have theories as to what might have happened at Tuco, but posting them will only draw anger and ire from current Tuco traders so I will keep my theories to myself. But I have a pretty good idea what happened.
I am very familiar with sub-LLC's ratboy and how they can go bad. I've been in this business long enough to see all the good AND the bad that comes from leveraging mediocre traders as a source of income. It sounds enticing on paper, but the reality is far from it. Regardless, I think before we jump to any conclusions we should wait and see what the court decides to do and what the final outcome is.