No, the SEC fined them for losing money stupidly. In order to have access to the market like they did, they had to follow certain laws that are enforced by the SEC. When they were losing all that money they weren't following those laws.

It's like if you cause an accident while you're driving by breaking the law; you get a traffic citation (and the accompanying fine), even if your car is totaled as a result of the accident, because you did something illegal.

Trading companies are supposed to have effective risk policy (i.e., they are supposed to think about what happens if things do wrong and formulate rules to ameliorate risks) and compliance controls (i.e., bureaucratic controls that ensure that policy actually is followed). The SEC charge does not paint a pretty picture on these counts, but the key point seems to be this one:

-- Relied on financial risk controls that were not capable of preventing the entry of orders that exceeded pre-set capital thresholds for the firm in the aggregate.

https://www.sec.gov/News/PressRelease/Detail/PressRelease/13...

(The charge also states that Knight violated rules on covering shorts, but I guess this is not so important).

The SEC is quite right to fine firms that have lost money with poor risk controls: the point is that bad risk management can hurt the whole sector. It is like fining a factory owner who lets their plant break pollution regulations.

They fined them for (accidentally) selling shorts they couldn't cover.