by Howard Haykin

Mizuho Securities USA agreed to pay a $1.25 million fine to settle SEC charges that it failed to maintain and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic customer order information concerning the repurchase of shares by issuers (“customer buyback order information”).

SEC FINDINGS.    From approximately December 2012 through December 2014 (the “Relevant Period”), Mizuho had in place certain policies and procedures aimed at preventing its execution and sales traders from disclosing material nonpublic customer buyback order information internally to other Mizuho traders and externally to customers. These pols and procedures required, among other things, effective information barriers between Mizuho equity trading desks and measures to protect confidential Mizuho customer order information, including the identities of buyback customers that had placed trade orders with Mizuho.

However, Mizuho traders regularly disclosed material nonpublic customer buyback order information to other traders and Mizuho’s hedge fund clients.  That information included the identity of the party placing the order, the order size, limit price, and indications that the orders were buyback orders. Such information was routinely communicated across trading desks even though Mizuho executed over 99.8% of all buyback orders by using algorithms, rather than through trader-negotiated open market trades during the relevant period.

As a result of these failures, during the Relevant Period:

• Mizuho’s execution and sales traders received confidential issuer buyback trade information on nearly every day that Mizuho executed buyback trades.

• The head execution trader on Mizuho’s U.S. Equity Trading Desk was given direct access to Mizuho’s International Trading Desk’s order management system, which included buyback purchase trade orders, and he also routinely disseminated such information to traders on his desk.

• On several occasions, Mizuho execution and sales traders disclosed to certain firm customers nonpublic customer buyback order information. The information often included the order size, the limit price, and key terms that indicated to the recipients that the orders were issuer buyback orders.
  • This trade information was valuable to other market participants, particularly given that the party placing the trade was the issuer.
  • Moreover, many of the issuer buyback orders that Mizuho handled during the Relevant Period comprised a significant portion of the daily trading volume in the stocks being bought back, which increased the potential impact of the buyback orders on the prices of those stocks.

[For further details on this case, click on SEC Order.]