Dive Brief:

• TD Securities will pay about $28.5 million to the Justice Department, the Securities and Exchange Commission and the Financial Industry Regulatory Authority related to a spoofing scheme involving one of the company’s former employees.
• The Canadian bank’s broker-dealer arm also entered into a deferred prosecution agreement Monday with the DOJ, connected to a wire fraud charge it faces in New Jersey district court, according to a release. Jeyakumar Nadarajah, a former director and head of TD Securities’ U.S. Treasuries trading desk, placed “hundreds of fraudulent spoof orders amounting to tens of billions of dollars,” manipulating the U.S. Treasuries market, the DOJ said. 
• “We take regulatory and employee conduct violations very seriously,” a TD spokesperson said in an email Monday. “We took action five years ago to report Mr. Nadarajah's behaviour to FINRA, terminated his employment and have since enhanced our monitoring and compliance capabilities.”

Dive Insight:

Nadarajah was indicted in November 2023 in connection with the spoofing scheme, which allegedly occurred between April 2018 and May 2019; he awaits trial. He’s been charged with two counts of wire fraud, seven counts of securities fraud and seven counts of securities manipulation, according to the DOJ.

“TD Securities placed hundreds of orders to buy and sell U.S. Treasuries that it never intended to execute, in order to deceive market participants and manipulate prices by creating the false appearance of supply and demand,” Principal Deputy Assistant Attorney General Nicole M. Argentieri, head of the Justice Department’s criminal division, said in the release. “Such efforts to profit through unlawful trading undermine public confidence in U.S. Treasuries markets and defraud other market participants.”

The bank, which failed to voluntarily self-disclose the conduct to the Justice Department, will pay the DOJ $15.5 million, which includes about $9.4 million for a criminal fine and $4.7 million in victim compensation, the department said.

TD Securities also agreed to enhance its compliance program and keep the government informed on remediation and implementation of the improved program.

TD Securities also settled with the SEC and FINRA regarding related proceedings. The SEC fined TD Securities $7 million and charged the bank with failing to supervise Nadarajah. The regulator found TD Securities “lacked adequate controls” and “failed to take reasonable steps to scrutinize the trader after receiving warnings of his potentially irregular trading activity,” the SEC said in its release.

Additionally, FINRA fined the company $6 million. That agency said TD failed to set up a supervisory system with written procedures designed to comply with securities laws and regulations and FINRA rules, from at least July 2017 to June 2021. 

“Although the firm prohibited spoofing, before July 2020, TD Securities (USA) had no written supervisory procedures addressing, and no systems or surveillance in place to detect, whether its traders were engaged in spoofing in U.S. Treasury securities,” FINRA said. 

Furthermore, the firm didn’t require the trader's direct supervisor to review for spoofing and, prior to February 2021, didn’t conduct any surveillance or supervisory reviews to look for cross-product spoofing in the U.S. Treasury markets, FINRA contended. 

FINRA also said TD didn’t do enough to investigate the issue after an internal surveillance alert and an external inquiry by an electronic trading platform flagged Nadarajah’s actions. The company has taken steps to remediate deficiencies, FINRA noted, including using surveillance provided by a third-party vendor in addition to its own surveillance programs, bolstering training with an emphasis on spoofing and improving processes for tracking and resolving surveillance alerts.

TD is bracing for an even bigger fine. The bank is in talks with U.S. prosecutors over a possible guilty plea to criminal charges related to an anti-money laundering probe the company has faced, The Wall Street Journal reported last week. 

The TD spokesperson declined to comment on that report. TD CEO Bharat Masrani, who is leaving his post next April, has said the bank expects “a global resolution” on the AML matters by the end of the year. TD has set aside about $3.57 billion for expected fines related to that issue.  

TD is hardly the only bank to catch the DOJ’s – or FINRA’s – ire over spoofing in recent years. FINRA fined Bank of America $24 million last year over 717 spoofing incidents executed by two former traders in U.S. Treasury secondary markets over a span of more than six years. 

Two JPMorgan Chase precious-metals traders were convicted in 2022 on charges including spoofing, wire fraud, commodities fraud and attempted price manipulation. A third defendant was acquitted.