SEC Sues Individuals for Perpetrating Scheme to Defraud Broker-Dealers

The SEC charged several individuals for perpetrating a "free-riding" scheme involving the fraudulent use of instant deposit credit extended by certain broker-dealers.

In a Complaint filed with the U.S. District Court for the Eastern District of New York, the SEC alleged that the individuals engaged in matched trading in illiquid securities without ever funding the trading account to which the credit was extended. The SEC contends that because the individuals controlled both sides of the matched trades, they were able to make the trades at artificial prices and thus repeatedly generate trading profits for one account's side of the trade while continuing to take losses in the other. The SEC argued that this strategy allowed the individuals to "exhaust" the instant deposit credits of the accounts before ultimately abandoning them at the expense of the broker-dealer.

The SEC said that the scheme created profits for the individuals of at least $2 million, at the expense of broker-dealers. The SEC alleged that the individuals violated Exchange Act Section 10(b) ("Regulation of the Use of manipulative and deceptive devices") and Rules 10b-5(a) and (c) ("Employment of manipulative and deceptive devices") thereunder.

The SEC is seeking a final judgment from the Court that includes permanent injunctions, conduct-based injunctions, disgorgement of ill-gotten gains with prejudgment interest and civil monetary penalties.