SEC Freezes Profits From Scheme to Manipulate Avon Stock (with Lofchie Comment)

The SEC announced an emergency asset freeze of two U.S. brokerage accounts connected to schemes to manipulate Avon and other stocks.

According to the Complaint, the SEC recently tracked a filing on its EDGAR system about a false Avon tender offer to a foreign entity using an IP address located in Sofia, Bulgaria. The filing revealed an account holding a "substantial position" in Avon contracts-for-differences that were losing value in recent months. The SEC alleges that the Bulgarian trader made approximately $5,000 in excess profits by selling almost half of the account's Avon contracts-for-differences at inflated prices after the EDGAR filing led to a 20-percent increase in the value of Avon stock.

Lofchie Comment: The attempted fraud recalls a case in which the hack of the Associated Press's Twitter account produced a fake report. In that case, the fake report claimed that the White House had been hit by two explosions and that Barack Obama was injured, which resulted in, among other things, a significant even if short-lived market tumble. One potentially discomforting fact in this more recent story is how little money the fraudsters would have made. It is illustrative of the ability of even small-time criminals to disrupt the markets by creating false news. This looks like good work by the SEC in finding the bad guys, particularly as this type of crime is likely to be repeated. One small point of interest in this case (of no legal significance) is that the SEC enforcement staff seemed to suggest that contracts for differences ("CFDs") are materially different from equity swaps. At points 21 and 22 of the SEC's Complaint, the SEC describes CFDs as contracts that are not usually traded in the United States, but typically move up and down with the price of the underlying stock; i.e., just like equity swaps. It is not clear why the SEC made the distinction; any difference in trading procedure is of no relevance to the economics of the contracts or the significance of the fraud.

See: SEC Press Release; SEC Complaint.