Reminder: Parking Stock is Illegal

It seems that every once in a while securities professionals need to be reminded that conduct that they think is done in the "ordinary course of business" is actually a securities law violation, with significant consequences.

Today's reminder is directed at Wall Street traders - arranging for another trader at another firm to take your position for a few days, with an agreement to buy it back is illegal.

Traders have been doing this for years, and apparently the practice is so widespread that many traders do not give it a second thought - until the trade blows up. A few years ago I represented a trader who agreed to hold a position for a fellow trader over the end of the month. The friend needed to reduce his position for month end. The trader-friend asked my client to buy the position, and agreed to purchase it back in four days at a small increase in price.

Unfortunately, over the weekend the underlying security crashed, and the trader-friend could not repurchase the position, leaving my client with a significant loss in his trading account, and an employer who was extremely upset, to say the least.

That one favor led to a termination of his employment, a lengthy arbitration (which we won), a FINRA investigation and settlement, the loss of his license and ultimately a bankruptcy. While the result might be extreme, it is not unusual.

The SEC recently filed charges against two traders involved in what the SEC labeled  a "fraudulent parking scheme" similar to the one I described above. One trader temporarily placed securities in the other's trading book to avoid penalties that would affect his year-end bonus.

The SEC's Enforcement Division alleged that Trader G solicited the assistance of Trader K to evade a policy at his firm that penalizes traders financially if they hold securities for too long. Trader G arranged for Trader K, who worked at a different firm, to purchase several securities with the understanding that G would repurchase them at a profit for K's firm. By parking the securities in K's trading book in order to reset the holding period when he repurchased them, G's intention was to avoid incurring any charges to his trading profits and ultimately his bonus for having aged inventory.

The alleged round-trip trades caused G's firm to lose approximately $174,000. The SEC's Enforcement Division alleged that after G's supervisor began inquiring about the trades, G and K took steps to evade detection by interposing an inter-dealer broker in subsequent transactions and communicating by cell phone to avoid having conversations recorded by their firms. G and K were eventually fired by their firms for the misconduct.

K, who cooperated with the SEC investigation, agreed to settle the charges by disgorging his profits and being barred from the securities industry. Any additional financial penalties will be determined at a later date. The Enforcement Division's litigation against G continues in a proceeding before an administrative law judge.

The order against G alleges that he willfully violated Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The order alleges that he willfully aided and abetted and caused violations of Section 17(a) of the Exchange Act and Rule 17a-3.

The order against K finds that he willfully aided and abetted and caused G's violations. The Commission took into account K's cooperation when agreeing to the settlement. K agreed to pay disgorgement of $22,606.80 and prejudgment interest of $1,503.66. The cease-and-desist order bars K from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization as well as participating in any penny stock offering, with the right to apply for re-entry after three years.

K did a friend a favor. And lost his license.

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Mark Astarita is a nationally recognized securities litigation attorney, representing firms and brokers nationwide in regulatory, litigation and arbitration matters. He can be reached at 212-509-6544 or by email at mja@sallahlaw.com

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Honolulu Woman Charged with Fraud Through Social Media

According to the SEC, its investigation found that Keiko Kawamura engaged in two separate fraudulent schemes to raise money from investors while casting herself as an investment and hedge fund expert when in fact she had virtually no prior trading experience. In one scheme, she sought investors for her self-described hedge fund and posted on Twitter some screenshots of brokerage account statements suggesting she was personally obtaining incredible investment returns. However, the account statements were not hers. And instead of investing the money she raised from investors, she spent it on her own living expenses and luxury trips to Miami and London. In a later scheme, Kawamura continued to boast phony experience to attract investors to her subscription service for investment advice. She falsely told subscribers that she had been in the investment banking industry for nearly a decade and had achieved 800 percent returns in her personal brokerage account.

"As alleged in our case, Kawamura used social media to ensnare investors and raise money to support her lifestyle," said Michele Wein Layne, director of the SEC's Los Angeles Regional Office. "Investors should beware of fraudsters who use social media to hide behind anonymity and reach many investors with little to no cost or effort."

The SEC's order instituting administrative proceedings alleges that Kawamura willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 20(4)-8. The administrative proceedings will determine any remedial action or financial penalties that are appropriate in the public interest against Kawamura.

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New Jersey Brokerage Firm Charged in Manipulation

The Securities and Exchange Commission charged the owner of a Holmdel, N.J.-based brokerage firm with manipulative trading of publicly traded stocks through an illegal practice known as "layering" or "spoofing."

The SEC also charged the owner and others for registration violations. Two firms and five individuals agreed to pay a combined total of nearly $3 million to settle the case.

In layering, the trader places orders with no intention of having them executed but rather to trick others into buying or selling a stock at an artificial price driven by the orders that the trader later cancels. An SEC investigation found that Joseph Dondero, a co-owner of Visionary Trading LLC, repeatedly used this strategy to induce other market participants to trade in a particular stock. By placing and then canceling layers of orders, Dondero created fluctuations in the national best bid or offer of a stock, increased order book depth, and used the non-bona fide orders to send false signals to other market participants who misinterpreted the layering as true demand for the stock.

"The fair and efficient functioning of the markets requires that prices of securities reflect genuine supply and demand," said Sanjay Wadhwa, senior associate director of the SEC's New York Regional Office. "Traders who pervert these natural forces by engaging in layering or some other form of manipulative trading invite close scrutiny from the SEC."

Joseph G. Sansone, co-deputy chief of the SEC Enforcement Division's Market Abuse Unit, added, "Week after week, Dondero lined his pockets by placing phony orders and tricking others into trading with him at distorted prices. The fact that Dondero perpetrated this deceit through the entry of trade orders did not allow him to evade detection."

The SEC additionally charged Dondero, Visionary Trading, and three other owners with operating a brokerage firm that wasn't registered as required under the federal securities laws. New York-based brokerage firm Lightspeed Trading LLC is charged with aiding and abetting the registration violations, and its former chief operating officer is charged with failing to supervise one of the Visionary owners who shared with his co-owners commission payments that he received from Lightspeed while he was simultaneously working as a registered representative there.

According to the SEC's order instituting settled administrative proceedings, the misconduct occurred from May 2008 to November 2011. Visionary Trading and its four owners – Dondero, Eugene Giaquinto, Lee Heiss, and Jason Medvin – illegally received from Lightspeed a share of the commissions generated from trading by Visionary customers. Lightspeed aided and abetted the violation by ignoring red flags that Visionary and its owners were receiving transaction-based compensation while Visionary and its owners were not registered as a broker or dealer or associated with a registered broker-dealer firm.

According to the SEC's order, Lightspeed also failed to establish reasonable policies and procedures designed to prevent and detect the improper sharing of commissions between its registered representatives such as Giaquinto, who was associated with Lightspeed for part of the relevant period, and others who were not registered with the SEC in any capacity. Lightspeed's former COO Andrew Actman failed reasonably to supervise Giaquinto by not taking appropriate steps to address red flags indicating that Giaquinto was sharing commission payments that he received from Lightspeed with the other Visionary owners.

The SEC's order finds that Dondero violated Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Visionary and its owners willfully violated Section 15(a)(1) of the Exchange Act. Giaquinto willfully aided and abetted and caused Visionary's and his co-owners' violations of Exchange Act Section 15(a)(1). Lightspeed willfully aided and abetted and caused Visionary's and its owners' violations of Exchange Act Section 15(a)(1). Lightspeed and Actman failed reasonably to supervise Giaquinto.

In settling the SEC's charges, Dondero agreed to pay disgorgement of $1,102,999.96 plus prejudgment interest of $46,792 and penalties of $785,000 for a total exceeding $1.9 million. He agreed to a bar from the securities industry. Giaquinto, Heiss, and Medvin must each pay disgorgement of $118,601.96 plus prejudgment interest of $14,391.32 and a penalty of $35,000 for a combined total of more than $500,000 from the three of them. They are barred from the securities industry for at least two years. Lightspeed must pay disgorgement of $330,000 plus prejudgment interest of $43,316.54, post-order interest of $4,900.38, and a penalty of $100,000 for a total of approximately $478,000. Actman agreed to a penalty of $10,000 and a supervisory bar for at least one year.

SEC Charges Owner of N.J.-Based Brokerage Firm With Manipulative Trading