SEC Charges Trader, Broker In Spoofing – Cross-Market Manipulation
The Commission’s latest market manipulation action centers on a foreign trading firm with an undisclosed owner and a U.S. broker-dealer where the undisclosed owner was imbedded as a registered representative, facilitating the scheme. The foreign trading firm became the broker’s largest client as it repeatedly engaged in profitable spoofing or layering and cross-market manipulation schemes to the detriment of the investing public. SEC v. Lek Securities Corporation, Civil Action No. 17-cv-1789 (S.D.N.Y. Filed March 10, 2017).
The action centers on trading by Vali Management Partners d.b.a. Avalon FA Ltd. through Lek Securities Corporation. Avalon is a Seychelles entity based in Kiev, Ukraine. The firm is a day-trader that uses mostly foreign traders. During the period of this action the trading firm had an account at defendant Lek Securities, a New York City registered broker-dealer. Defendant Sergey Puarwlnik is an undisclosed control person of Avalon. He was a foreign finder for LEK in late 2010 and early 2011 and then became a registered representative. He is also a close friend of defendant Nathan Fayyer, the sole owner and director of Avalon.
Avalon began implementing two manipulative schemes through its account at Lek. The first, beginning in 2010, used spoofing or layering to generate profits of $21 million over a period of about six years. Spoofing or layering involves the use of non-bona fide orders for a particular security placed to move the price in a specific direction. Those orders inject false information into the market place because they appear to be actual transactions when in fact they are not. The non-bona fide orders essentially create a false trend in the market in one direction, either moving the share price up from purchases or down from sales, to the detriment of other traders. As the market moved Avalon would take advantage of the price changes to place profitable orders in the opposite direction. The non-bona fide orders were then cancelled. This yielded trading profits for Avalon at the expense of other traders who entered into transactions at what were essentially artificial prices.
Avalon varied its approach but essentially it operated as follows: 1) multiple and increasingly higher non-bona fide orders to buy a stock would be placed; simultaneously orders the firm intended to execute were placed in the opposite direction; 2) the buy orders helped to increase interest on that side of the market; 3) the apparent buying trend resulted in purchases, portions of which were from Avalon sales – the firm sold at higher prices than were otherwise available; 4) once the bona fide sell orders were executed all of the outstanding non-bona fide buy orders were cancelled; 5) frequently Avalon would then reverse the strategy.
Avalon engaged in the cross-market manipulation scheme from August 2012 through the end of 2015. Essentially the scheme involved buying and selling U.S. stocks at a loss, creating an artificial price for the purpose of moving the prices in the corresponding options market. For example, Avalon would: 1) buy or sell a stock for the purpose of pushing the price higher or lower; 2) the stock trades resulted in the price for the corresponding options for the security to move significantly, permitting the firm to take advantage of the change; 3) Avalon then bought or sold a large quantity of options at more favorable prices than would have been available; and 4) by the conclusion of the manipulation the share price of the stock would return to its prior level, increasing the profitability of Avalon’s position.
Lek Securities made the manipulations possible, according to the complaint, by giving Avalon access to the markets, improving the technology used and relaxing its layering controls following a complaint from the trader. Lek registered representative and undisclosed Avalon control person Puariolnik also aided the manipulation. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The case is in litigation. See Lit. Rel. No. 23776 (March 10, 2017).