The US Securities and Exchange Commission has pressed fraud charges against 13 people allegedly involved in two Long Island-based cold-calling scams that defrauded more than one hundred victims out of more than $10 million.

The SEC refers to thousands of cold calls that included the use of threatening and deceitful sales techniques to pressurise victims – many of them of pensionable age – into purchasing penny stocks, with some harrying and threatening involved. In a typical phone call, it says, the telemarketers would direct victims to place trades and tell them how many shares to purchase and the prices at which to do so. With this information about the victims’ trades, the orchestrators and the boiler room sales personnel allegedly placed opposing sell orders to dump their own shares, realising more than $14 million in illegal proceeds while the victims lost millions of dollars. The SEC’s complaint, lodged in federal district court in Brooklyn, charges all defendants with fraud and nine with market manipulation.

SEC investigators learned of the alleged scheme from investors. They allege that the defendants went to great lengths to evade detection. Jon Donegan, a compliance consultant at Cordium, told Compliance Matters some time ago that the SEC and its little brother, the Financial Industry Regulatory Authority, directed fewer resources to protect HNW customers except when they were old and vulnerable to boiler-room frauds.

"The SEC and FINRA do have an HNW category and they regulate them more lightly but every bit of advertising you want to do to senior citizens has to go by FINRA. If you are doing it, you’ll get a visit every year. A lot of people prey on these people. It is a mistake to treat someone as an HNW, unless he’s been trading options all his life. They still try! You can even receive an SEC reward for stopping a fraudster, although not if you’re a compliance person, because then you’re just doing your job."

In a parallel action, the US Attorney’s Office for the Eastern District of New York has announced criminal charges.

Types of market manipulation

One of the alleged offences was "marking the close," a type of market manipulation that occurs when someone tries to influence the closing price of a security by executing purchase or sale orders just before the very end of the trading day.

The regulator has also accused the firms, Power Traders Press and Elite Stock Research, of "matched trading" which happens, according to SEC v Wilson (2009), “when an individual enters an order or orders for the purchase or sale of a security registered on a national securities exchange with the knowledge that an order of substantially the same size, at substantially the same time and at substantially the same price, for the sale or purchase of such security, has been or will be entered by or for the same or different parties.”

The SEC additionally accuses the firms of "wash trading," defined by the British Financial Conduct Authority in MAR 1.6.2 as a sale or purchase of a qualifying investment where there is no change in beneficial interest or market risk, or where the transfer of beneficial interest or market risk is only between parties acting in concert or collusion, other than for legitimate reasons.

Regulatory action against such practices accelerated in the US last summer and is likely to remain at an all-time high for the rest of this year. The aforementioned types of trade have been around for a long time, but the Dodd-Frank Act 2010 targeted another - spoofing - which (although not an offence mentioned in this case) has been the subject of many recent investigations and which involves high-speed algorithms.

Section 4c(a) Commodity Exchange Act (which Dodd-Frank amended) refers to spoofing as bidding or offering with the intent to cancel the bid or offer before execution. The Commodity Futures Trading Commission interprets the spoofing prohibition in s4c(a)(5)(C) as covering bid and offer activity in all products traded on all registered entities, including swap execution facilities and designated contract markets (SEFs and DCMs). This time last year the London Financial Times reported that the first person to be found guilty of spoofing was sentenced to three years' imprisonment, sending a sober message to other high-frequency electronic traders.