This is an attorneys response (i guess) to the tuco trading/sub-llc
Attorney Responds: Unregistered B/D Accused of Defrauding Day Traders ..."
Comment #1 - Before Reading TucoTrader Response.
I have a bad suspicion that the SEC is leaving some very important facts out of this case. I don't know Tuco and am not involved in this case, but I know this fact pattern. There are a lot of day trading shops that set up as LLCs. The day traders become members of the LLC. They may think of their capital as their account - but it's not. They made a capital contribution to the LLC and became a member of the LLC. The profits and looses of their trades are credited to their capital account with the member - but it isn't a real "account" in the securities-law sense of the word.
Understood in this context, the unregistered BD isn't one. A broker is defined as someone engaged in the business of effecting securities transactions for the account of others. But there's no "other" here. The LLC is engaged in the business of trading its own capital. And it doesn't steal customers' money to pay expenses and cover other customers' losses - it uses the LLC's money to pay the LLC's expenses and cover the LLC's losses. And Tuco didn't receive transactions-based compensation for its members' trading, members of the LLC traded the LLC's account. This is a very common arrangement that three separate offices of the SEC have started looking into and they all think these firms are getting around the spirit of the law - they don't want to talk about the letter of the law. In fact, SEC's market reg won't even answer the regional offices' question whether these entities are BDs, because market reg isn't remotely sure they are. I don't doubt there may be some bad facts here, such as Tuco's marketing materials not always explaining all of this properly, but I'll be real surprised if these 250 "customers," some of whom are very sophisticated stat arb traders that worked for major broker-dealers, didn't sign an LLC Operating agreement spelling all of this out.
Comment #1 - After Having Read TucoTrader Response.
Ah. Sorry, didn't see that. I suspect he's exactly right. I'm not saying this is all one-sided. There is an SEC argument here on the BD registration, which is that the "lead" manager or organizing manager usually does take transaction based "compensation" by debiting each LLC member trader's capital account a commission-like fee for shares traded and crediting his own account the same amount. And that does make the LLC or its lead member look a little like a broker, but the counter argument to this is the charge is an internal function of the LLC operating agreement and, at least when viewed from outside the LLC, doesn't involve charging anyone anything. The LLC has the same amount of money before the fee as after, only the members' capital accounts have changed.
As you can see from this guy's comments, he is no dumb innocent. He's a sophisticated guy. Real customers don't find their way to shops like this and shops like this don't want real customers. The lead members of these LLCs always have substantial amounts of their own money in the LLC and all the traders are fundamentally cross-collateralizing each other since they are equity holders and the broker-dealer carrying the LLC's account and extending credit to the LLC is a secured creditor of the LLC, not the LLC's individual capital accounts. These guys know and understand this. In other words, these LLCs look a lot more like SAC Capital and Citadel, a hedge fund with separate portfolio managers running separate strategies and that also happen to have contributed capital as a member of the fund.
The SEC trying to cite them for day-trading margin violations is just plain sloppy. Whether or not the LLC should have been a broker-dealer, it clearly wasn't a member of any self-regulatory organization and therefore wasn't subject to the day-trading margin rules, even if a court subsequently determines that they were acting as an unregistered broker-dealer.
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^Not me.. Good points though. I like it.
