On October 16, 2019, The Securities and Exchange Commission filed an emergency action and obtained an asset freeze against 18 traders in a multiyear scheme to manipulate more than 3,900 U.S.-listed securities that resulted in more than $31 million in illicit profits.
The SEC alleges that the traders, who are primarily based in China, manipulated the prices of thousands of thinly traded securities by creating the false appearance of trading interest and activity in those stocks, thereby enabling them to benefit by artificially boosting or depressing stock prices.
According to the SEC’s complaint, the traders used multiple accounts to place several small sell orders to drive down a stock’s price before using a different set of accounts to buy larger amounts of the stock at the artificially low prices. After accumulating their position, the traders then flipped the script and placed several small buy orders to push up prices so they could then sell their stock at artificially high prices.
A Different Kind of US-China Trade Controversy
Beginning in 2012, the defendants engaged in a market manipulation scheme by using dozens of accounts at several different brokerage firms to artificially influence the prices of many publicly traded securities. The design and intent of the scheme was to create the false appearance of trading interest and activity in particular stocks, thereby enabling them to reap illicit profits by artificially boosting or depressing stock prices.
The defendants generally used at least two brokerage accounts when manipulating the price of a particular publicly traded stock. They first typically used at least one (helper) account to place multiple small purchases or sale orders to create upward or downward pressure on the stock price. The defendants then typically used at least one other (winner) account to purchase or sell larger quantities of stock at prices that had been affected by the manipulative orders placed by helper accounts.
The Defendants often held the winner and helper accounts at different brokerage firms to conceal from each brokerage firm the coordination between the two types of accounts. In other deceptive conduct designed to avoid detection, nominee accounts were held in the names of individuals and entities other than themselves, and defendants misrepresented the nature of their trading to brokerage firms. The result? Millions of dollars of illicitly generated proceeds.
Cross/Wash Trades
The scheme began to unravel when brokerage firms noticed suspicious activity as part of their standard due diligence to ensure customer protection and market integrity. One brokerage firm warned defendants of SEC intervention if the cross/wash trades being made represented acts of intentional market manipulation and requested they “respond in writing as to the economic rationale and/or trading strategy used when you placed the above reference trades.” Another firm sent one defendant an email stating, in relevant part: “Our records indicate that you had orders rejected for possible cross trades violations at our firm in February. Cross/wash trades can be viewed as a form of market manipulation and could result in a significant federal violation.”
The defendant in question provided the following false and materially misleading response: “I found that when I want to sell these positions, I used the wrong hot key, and the buy orders may be placed, so the sell orders were rejected, I have changed the setting of hot keys for sell orders, so I think I will be ok. I apologize for any inconvenience caused the mistake.”
This specific SEC enforcement action illustrates how brokerage firms must remain vigilant to detect illegal trading activity since bad actors continue to develop new ways to manipulate markets and harm investors. It’s always a good time to review policies and procedures to make certain your firm is in step with evolving best practices in this area.
Core Compliance Legal Services has an experienced team of professionals who can assist and expand your efforts to protect clients. Contact us online or give us a call at (619) 278-0020 and let’s discuss ways we can meet your specific needs.