Stock manipulations often take place in the over-the-counter markets which are less regulated than major exchanges such as the New York Stock Exchange and NASDAQ. Frequently the manipulations are raw pump-and-dumps where the promoters hold a large or even a controlling position in the stock, cause misleading publicity to be sent out regarding the stock in conjunction with manipulative trading and then sell their stake as the price climbs. When the promoter has sold his or her block of stock the publicity ends and the price collapses. The manipulator wins; the public loses.
The Commission’s most recent manipulation case has none of these elements. Rather, it took place on major exchanges and was built only on manual trading without false publicity. But over 2,000 stocks were manipulated and $26 million in profits were generated in about two years. SEC v. Taub, Civil Action No. 2:16-cv-09130 (D. N.J. Filed December 12, 2016).
Defendant Joseph Taub directed the scheme with assistance from defendant Elazar Shmalo. EAC Capital LLC and LNW Direct LLC, both limited liability companies controlled by Mr. Taub, were involved. Mr. Taub was previously a registered representative. Mr. Shmalo describes himself as either self-employed or unemployed.
The scheme began in January 2014 and continued through the end of 2015. During that period the defendants controlled 36 accounts at nine brokerage firms. Generally, securities were traded in a coordinated fashion with one account being the “winner” and the other the “helper.” The scheme, which in some ways mimicked high speed trading in the form of spoofing without the high speed, involved the following steps:
Accounts: Defendants would trade two accounts in coordination on the same day using the same exchange traded stock; typically that stock was thinly traded;
Initial trades: The helper account would place multiple buy (or sell) orders to create the appearance of upward (or downward) pressure on the stock price; the price would move up (or down);
Follow-up trades: The winner account would primary place large buy (or sell) orders executed at the artificial prices generated by the helper account;
The process would then be reversed. The same manipulation would take place on the opposite side. In this instance a series of small buy order of 100 to 400 shares in one or more helper accounts were placed. The winner account would then execute against those orders in blocks of 1,000 to 1,400. Once the winner account completed its trades the remaining orders would be cancelled. Profits would be a few thousand dollars while the helper account would have small losses.
The defendants repeated this processed at least 23,000 times during the period yielding millions of dollars in profits. About 20% of the time small losses averaging about $600 per event resulted.
Generally, the trades were placed using accounts in the name of the defendants or those of relatives. In a number of instances the trades were flagged by the compliance department of the brokerage firm. In those instances the traders would feign ignorance. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The action is pending.
The U.S. Attorney’s Office brought a parallel criminal action.