SEC – A Computer and Twenty-Seven Minutes To Profit
The SEC’s latest stock manipulation case might be titled “How to make (almost) over $400,000 in just 27 minutes.” The key is to use Williams Act filings not to alert the market and issuer to a potential take-over but to fake one. SEC v. Aly (S.D.N.Y. Filed May 24, 2016).
Defendant Nauman Aly is a resident of Pakistan. He claims to have a business in Elkhart, Indiana and Portland, Oregon. In mid-April 2016 he is alleged to have manipulated the share price of Integrated Devices Technology, Inc. or IDTI, a high tech firm based in San Jose, California. To effectuate his plan Mr. Aly took the following steps:
Options: On April 12, 2016 at 11:50 ET he purchased IDTI call options at a cost of $18,500 for 185,000 shares of stock with a strike price of $20.00. The options were set to expire three days later. On the date of the option purchase the share price for IDTI was $19.01. The purchase was made from a computer in Pakistan.
EDGAR: Approximately eight minutes after the option purchase Mr. Aly logged on to EDGAR from the same IP address as the one used to purchase the options.
Filing: Eighteen minutes after the option purchase a Schedule 13D was filed on EDGAR for a group of six Chinese citizens. The filing stated the six individuals constituted a group and had acquired beneficial ownership of 5.1% of IDTI stock. The group reputedly owned stock and call options. The filing had Mr. Aly’s electronic signature.
Offer: Attached to the Schedule 13D was a draft merger agreement and a copy of the letter to IDTI. The filing represented that a letter had been sent to the IDTI board containing an offer to acquire all of the outstanding shares of the company at a price of $32, a 65% premium to market.
The IDTI share price increased 25% to $23.99 by 12:17 p.m. or 27 minutes after the option purchase. At 12:18 p.m. Mr. Aly sold the options using the same computer employed to make the filing and the purchase. The sale netted him $425,000.
Fifty-three minutes after the option purchase Mr. Aly filed a second Schedule 13D. The filing stated that the Reporting Group no longer owned a beneficial interest of over 5% of IDTI stock because Mr. Aly had sold the call options. Later the same day IDTI issued a press release stating that the firm had not received a letter about the merger or the draft merger agreement.
The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The Commission obtained a freeze order over the trading profits on filing. The case is pending.