Several months after the United States Securities and Exchange Commission (SEC) filed a complaint against BTIG, LLC, the broker-dealer has responded to the allegations.

On September 17, 2021, BTIG filed an answer to the SEC’s complaint with the New York Southern District Court. The document, seen by FX News Group, denies all SEC allegations.

Let’s recall that, According to the SEC’s complaint, from December 2016 through July 2017, BTIG mismarked as “long” or “short exempt” over 90 sale orders from a single hedge fund customer – totaling more than $250 million in sale orders and comprising nearly 160 million shares of stock. This is in violation of Rule 200(g) of Regulation SHO.

BTIG’s customer was not deemed to own the shares of stock sold, because the Hedge Fund: (i) did not have title to the stock; (ii) had not purchased or entered into an unconditional contract binding on both parties thereto to purchase the stock; (iii) did not own a security convertible into the stock that it had tendered for conversion; and (iv) did not have a net long position in the stock. BTIG’s customer was, therefore, “short,” and BTIG should have correctly marked its customer’s sale orders as “short.”

BTIG also did not have the shares of stock that the Hedge Fund sold in its possession or control and did not reasonably expect to receive those shares by the settlement date. Accordingly, BTIG should have marked its customer’s sale orders as “short” on this additional, independent ground.

On each of these over 90 occasions, BTIG also failed to borrow and locate shares before executing these effective short sales, in violation of Rule 203(b)(1) of Regulation SHO.

As a broker-dealer registered with the SEC, BTIG had independent gatekeeper responsibilities under the federal securities laws to ensure that the orders it executed were correctly marked. BTIG was not entitled to simply rely on its customer’s representations concerning order marking. Rather, BTIG was obligated to independently verify that its customer was, in fact, long, before marking the trades.

Further, according to the complaint, BTIG failed to verify that the Hedge Fund was deemed to own the shares of stock sold. BTIG did not have the shares of stock sold in its physical possession or control at the time it marked the sale orders, and BTIG did not reasonably expect that the shares of stock would be in its possession or control by the settlement date.

Also, throughout the Relevant Period, BTIG ignored red flags indicating that the Hedge Fund was making false representations concerning its ownership of securities, which led to BTIG’s improperly marking the sale orders as “long” and “short exempt.” BTIG was aware of the Hedge Fund’s repeated failures to deliver stock for timely settlement.

Despite this and other red flags, BTIG continued to improperly mark the Hedge Fund’s sales as “long” and “short exempt,” without determining that the Hedge Fund was deemed to own the securities sold and that BTIG’s order markings were correct. They were not.

BTIG allegedly benefited its customer in several ways: (i) the Hedge Fund did not have to incur the expense of borrowing or locating shares of stock sold, which were costly and difficult to borrow at the time; (ii) BTIG was able to complete sales on behalf of its customer that otherwise would have been prohibited by a market regulation device; and (iii) the Hedge Fund effectively got two extra trading days to deliver the shares for settlement.

The SEC alleges that BTIG earned approximately $1.6 million in commissions from placing mismarked sale orders for the Hedge Fund. From March through July 2017, the Hedge Fund generated the highest revenue of all BTIG’s prime brokerage customers.

According to BTIG’s response, the Complaint, and each and every claim alleged therein, fails to state a claim on which relief can be granted.

BTIG notes that it reasonably relied on its customer’s representations and instructions, as well as its independent due diligence, in marking the sale orders at issue in satisfaction of its obligations under Regulation SHO.

Further, BTIG says that the Complaint does not sufficiently plead that BTIG’s alleged violations of the securities laws and/or the regulations promulgated thereunder caused any losses.

Also, according to BTIG, the SEC does not have statutory authority to obtain disgorgement from BTIG of any alleged “ill-gotten gains,” as requested in the Complaint.

That is why BTIG requests judgment dismissing with prejudice the SEC’s Complaint in its entirety.