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The SEC clarify their mischaracterisation of Maltese broker EXANTE

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EXANTE, a Malta-based broker with full regulatory approvals in Malta, Cyprus, Hong Kong, and the United Kingdom, won a welcome victory in the battle to clear its name over a false 2015 allegation from the US Securities and Exchange Commission. In February 2016, the SEC finally admitted that their August 2015 filing accusing EXANTE of insider trading was incorrect and based on a misunderstanding of the firm’s business model. The SEC announced they were dropping charges, a move proved to be a relief for company founders and management.

The SEC clarify their mischaracterisation of Maltese broker EXANTE

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Active since 2011, EXANTE traces its origins back to Malta, and is currently registered with the FCA and SFC in London and Hong Kong, in addition to Cypriot and the Maltese regulators. EXANTE is an execution-only brokerage for retail and professional clients, and it is a business that has continued to thrive despite the headwinds caused by the SEC’s mistaken actions.

Unexpected Allegations

EXANTE was blindsided in August 2015 by an SEC filing accusing the firm of acting alongside a roster of European and American investment funds to profit from insider information. The allegations were complex, with funds accused of accessing non-public information hacked from financial news services by a team of hackers. This information was sold to investment funds who used it to trade ahead of corporate announcements, netting significant profits.

The original SEC filings mischaracterised EXANTE as acting as one of these hedge funds, some of whom used EXANTE as a broker. These charges falsely stated that EXANTE acted as an investment manager and had profited on their own account from trades executed through the platform. This was a serious charge, but also a bizarre one, since EXANTE operates according to its license as an execution-only broker and does not ‘invest’ in the way hedge funds do.

Since they have a mandate only to execute client positions, the original accusations were impossible – EXANTE does not trade, except when following the directions of their clients, using client money, so they could not be guilty of insider trading. It is not immediately clear what led to this major oversight, but EXANTE spokespeople were swift in their response, eventually winning an admission by the SEC that they had mischaracterised EXANTE’s role in the marketplace.

Fortunately, the unpleasant shock of this announcement has not derailed EXANTE’s growth trajectory. The broker continues to grow its product suite and client base, with EXANTE experiencing rapid growth since the 2015 incident. The swift response of the broker to the claims was key in protecting EXANTE’s reputation.

Understanding the Allegations

The question of how EXANTE came to be involved at all has also gradually become clear in recent years: among the genuinely accused existed a very small number of EXANTE clients, who have now settled with the SEC. Since hedge funds and execution brokers work together to deal, and EXANTE specialises in providing services to investment management clients, some of the illicit transactions passed through EXANTE client accounts. It appears the SEC mistook these transactions for deals made by EXANTE, rather than the normal order flow for an execution desk.

That a small number of clients were involved in no way implies the broker had any knowledge of insider transactions. A trade on inside information is normally undetectable to a broker, where it appears identical to any normal equity investment. In this case, as in most cases involving insider trading, the ring was exposed when the source of the leaked information, two computer hackers, were apprehended. Unfortunately, in this case, it seems EXANTE was an unwitting and unwilling participant in the dubious practices of another fund.

Since most hedge funds will have execution accounts with multiple brokers, the ultimate route to market of an insider trade cannot be blamed on the execution service, only on those who knowingly conspired to do so. Without wishing to labour the point made above, EXANTE does not take proprietary positions, does not trade client money, and instead provides an execution platform for third-party traders without influencing their positions or advising on holdings. In most cases, the execution platform is irrelevant as any illegal activity takes place in the investing fund and not the broker where trades are executed.

One suspects that given the international nature of the listing, US regulators struggled to identify the business function of EXANTE, a mistake that could have been neatly avoided by contacting the broker before filing charges. Nonetheless, this is a costly oversight with a serious reputational risk to the broker, who was forced to fight to protect their reputation, eventually winning a retraction. Once the charges were dropped in February 2016, it became time for the broker to refocus on their business and move past this unfortunate episode. This of course required a public response.

EXANTE’s Response and SEC’s Correction

EXANTE did not let the SEC’s errors go unchallenged. When dealing with this sort of reputational risk, swift action is essential: In an immediate statement, EXANTE spokespeople offered their response to the charges, highlighting how they have worked directly with regulators to clear their name and hold to account any participants involved in illegal market activity.

The response of the SEC was positive, with a clarification issued on the matter of EXANTE’s function and the dropping of mistaken charges. Of course, EXANTE’s main concern since the shock announcement of the charges (for which there was no prior warning or contact) has been to ensure a smooth and continuous client service for their global trader base. Fortunately, EXANTE’s response to regulators in the US and the SEC’s eventual admission of error has cleared EXANTE of wrongdoing, but the initial announcement was widely reported in financial media.

As is often the case, the dropping of charges attracts less media interest than their filing, resulting in an unwarranted stain on the broker’s reputation. Since 2016, EXANTE has gone from strength to strength commercially, growing its international footprint and continuing to execute client trades with a focus on product innovation, client privacy, and first-in-class customer service. But even groundless claims can harm reputations, so the fight remains on to undo the harm of this unfortunate error.

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