A jury verdict, an ex-FBI informant, and (off-shore) pattern day trading

A tale with some interesting twists and turns and a colorful character at the center of it all.

Last week, a federal district court in Florida delivered a jury verdict in the SEC’s favor, finding company boss Guy Gentile liable for not operating as an unregistered broker-dealer and for serving as the control person for the unregistered firm.

The SEC’s complaint for injunctive and other relief describes how Gentile, the owner, founder and CEO of Mintbroker International, Ltd (doing business as SureTrader) operated an offshore broker-dealer in the Bahamas designed to help day traders in the US circumvent US rules that regulate pattern day trading.

The regulator said that to bring in an influx of new customers, Gentile began marketing SureTrader as a way to avoid the Pattern Day Trading Rule (PDT), which is FINRA Rule 2270.

Just in case potential US customers could not infer the intention, SureTrader’s website explicitly advertised itself as a way “to avoid the nasty PDT Rule,” the SEC said.

And the complaint notes that up to 80% of SureTrader’s customer base was made up of US customers at various times during the relevant period and the firm’s business grew from a three-employee one to a business employing over 75 people with more than 40,000 customer accounts and assets of more than $10m.

The problem

By failing to comply with the broker-dealer requirements, Sure Trader and Gentile helped US customers circumvent FINRA rules and caused SureTrader to violate securities laws, namely, the laws prohibiting unregistered foreign broker-dealers from soliciting US customers.

And the noncompliance enabled the business to avoid certain regulatory obligations for broker-dealers that govern their conduct – from submitting to regular inspections and oversight to submitting appropriate filings and maintaining sufficient books and records.

PDT rule

FINRA defines PDT as “four or more day trades within a five-day period using more than six percent of a margin account’s total trade activity.”

FINRA’s PDT rule is designed to require that certain levels of equity be deposited and maintained in day-trading accounts, and that these levels be sufficient to support the risks associated with day-trading activities.

The SEC said SureTrader did not require customers to meet any of the requirements set forth in the US PDT Rules, such as requiring certain margin account balances or placing any other restrictions as required by the rules.

While PDT can produce considerable profits on a short-term basis, it also can create equally significant risk. High-net-worth-individuals can find PDT an attractive investment strategy, as they can more easily sustain large losses­­, but the average retail investor is far more susceptible to serious harm from this type of trading.

Guy Gentile’s ongoing battle with the SEC

Guy Gentile has a Wikipedia page that details his expertise and his high-frequency trading – and comes with some disclaimers.

His Bahamian operations as a securities dealer have been the subject of the agency’s ire for some time now. Indeed, in a 2020 decision in which the Third Circuit Court of Appeals refused to shut down an SEC investigation into his business dealings, the court quipped: “Guy Gentile and the Securities and Exchange Commission are not strangers.”

In 2012, he was arrested for an alleged pump-and-dump securities scheme, but avoided immediate charges for becoming an informant for the FBI. He ceased co-operating with the government in 2015 and in 2016 he was charged by the SEC for participating in two alleged penny-stock manipulation schemes dating back to 2008.

“SureTrader’s years-long failure to register as a broker-dealer deprived investors of significant protections, including SEC inspections, financial responsibility rules, and recordkeeping requirements.”

Sanjay Wadhwa, deputy director, SEC Division of Enforcement

Gentile was able to get both cases dismissed – one on timeliness grounds – but the SEC stayed on his heels, leading to the probing of his Bahamian brokerage. In 2020, the Third Circuit Court said the SEC needed to file a new complaint to go after Gentile on the new charges, but the agency opted not do.

And Gentile actually went on the offensive himself, seeking a declaration that the investigation and the SEC’s subpoenas were illegal. The SEC won dismissal of those charges later that year.

The SEC then brought suit against Gentile and other defendants in 2021 in a federal court in Florida (the others had been brought in New Jersey), and Gentile sought dismissal for reasons based on venue, saying the SEC engaged in “forum shopping,” but he was unsuccessful.

He did manage to delay pursuit of him, though, as he filed court documents alleging such things as “you can’t charge me for marketing to US-based traders when you directed me to ensnare US traders,” referring to his prior agreement with federal law enforcement.

And now you’re up-to-date.

The charges

Gentile and MintBroker were ultimately charged with SEC fraud and control person rules, but the SEC mentions FINRA Rule 2270 as the one that should typically apply to pattern day traders at FINRA-registered firms.

Under this rule, no member that is promoting a day-trading strategy can open an account for or on behalf of a non-institutional customer unless, prior to opening it, the member has furnished to each customer in paper or electronic form, a specific disclosure statement, plus posted such a disclosure statement on the member’s website in a clear and conspicuous manner.

The rule outlines how pattern day training can be extremely risky, can generate substantial commissions, requires adequate knowledge of a firm’s trading execution systems and procedures and must only occur at appropriately registered investment adviser or broker-dealer firms.

The SEC filed two counts against Gentile in this case: Section 15(a)(1) of the Exchange Act, which prohibits inducing to or attempting to induce the purchase or sale of securities without being registered and Section 20(a) of the same law, which spells out control person liability provides for liability of any person who controls an individual or entity that violates federal securities laws.

Investor protection and promoting PDT

After the 10-day jury trial, Sanjay Wadhwa, deputy director of the SEC’s Division of Enforcement, issued this statement: “SureTrader’s years-long failure to register as a broker-dealer deprived investors of significant protections, including SEC inspections, financial responsibility rules, and recordkeeping requirements. This trial underscores that the Commission will continue to hold responsible those who seek to evade the registration requirements of the federal securities laws.”

FINRA notes in its day-trading risk disclosure statement that evidence indicates that an investment of less than $50,000 will significantly impair the ability of a day trader to make a profit – and that (of course) an investment of $50,000 or more will in no way guarantee success anyway.

This disclosure document beseeches investors to not use things like their retirement savings this way. And it informs investors that day trading involves aggressive trading, since you generally pay commissions on each trade. Assuming that a trade costs $16 and an average of 29 transactions are conducted per day, an investor would need to generate an annual profit of $111,360 just to cover commission expenses,” FINRA notes.

Not only are FINRA and the SEC worried about retail investors engaging in PDT, the regulatory agencies were concerned with how SureTrader marketed and promoted itself through its website, email and third-party websites, offering potential customers the ability to open and account and trade with as little as $500, no margin account balances needed.

Indeed, the SEC noted in its complaint that the SureTrader website in October 2017 asked potential customers if they were “up for circumventing the rules and getting what you want.”

The complaint notes that the SEC sought disgorgement and civil money penalties, without giving details, and Bloomberg has reported that Gentile will appeal the ruling, expressing “shock” at the jury charge.