Two New Jersey-based traders allegedly engaged in a complex trading scheme involving coordinated stock trading in at least 36 accounts at nine different brokerage firms. The SEC charged Joseph Taub and Elazar Shmalo with manipulating more than 2,000 stocks listed on the New York Stock Exchange and NASDAQ since 2014, and realizing more than $26 million in profits from their trades.
As described by the SEC, the schemers used two or more coordinated accounts to trade on the same day in a particular exchange-traded stock. They generally targeted thinly-traded securities so that the stock price could be influenced by a few relatively small trades. In most cases, Taub and Shmalo would use one account, the "winner" account, to take a position in a stock, and then use a second account, known as a "helper" account, to place a series of small buy orders to walk up the price so that the winner account could sell its larger position into the market at an artificially high price. In some cases, the helper accounts would place a series of smaller sell orders to drive down the price of the stock, allowing the winner account to buy a larger position in that stock at an artificially depressed price.
The two traders placed at least 23,000 orders through 36 brokerage accounts, beginning in 2014. In most cases, they used two different clearing firms to mask the illicit coordination between the accounts.
In addition to the manipulative trading, the SEC charged that the defendants engaged in other deceptive conduct designed to evade detection, including making misrepresentations to brokerage firms to conceal the identities of traders in the various accounts and the nature of their trading. When brokerage firms closed some of the coordinated accounts due to compliance concerns, the defendants would often open new accounts at other brokerage firms, or at the same firm using a relative's name. When the defendants received compliance inquiries from the brokerage firms, they would deny any wrongdoing and feign ignorance of the rules. For example, Shmalo replied to one inquiry by stating that “I am very sorry about these occurrences. It was not my intention nor my knowledge that this activity would be interpreted or considered to be layering. I’ll make sure and be more careful that it doesn’t happen again.”
“As alleged in our complaint, Taub and Shmalo schemed dozens of times per trading day to artificially move stock prices for their personal benefit,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.
The SEC filed its complaint the U.S. District Court for the District of New Jersey. The complaint seeks permanent injunctive relief, the return of ill-gotten gains with interest and civil money penalties. In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced criminal charges against Taub and Shmalo.
Complaint, SEC v. Taub, Dkt. 16-cv-9130 (Dec. 12, 2016).
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