SEC-USAO File Actions On “Old Fashioned” Spoofing Scheme

Spoofing or layering is typically associated these days with computers and high speed trading. It is a form of market manipulation in which the trader places a series of fictitious orders on one side of the market to draw interest from would-be investors who believe they are real, legitimate orders. As the price moves the manipulator cancels the orders while capturing the price movement by entering orders on the other side.

Aleksandr Milrud is charged with doing it the old fashioned way. Eschewing high speed trades and crafted computer programs, Mr. Milrud supposedly engaged in spoofing by having people not programs and machines enter the trades. Using his own compliance system to avoid detection, the scheme yielded over $1 million per month. His mistake? He demonstrated the scheme to a broker who is now a cooperating witness for the government – caught the low tech, old fashioned way. SEC v. Milrud, Civil Action No. 2:15-cv-00237 (D. N.J. Filed Jan. 13, 2015); U.S. v. Milrud, Mag. No. 15-7001 (D.N.J. Jan. 13, 2015). Both cases are pending.

Mr. Milrud, a Canadian citizen resident in Ontario and Florida, began his scheme in 2013. He recruited groups of online traders based primarily in China and Korea. The traders were given access to trading accounts and technology. Each trader had a “dirty work” account and one for “clean” trades. The accounts were held at different clearing firms to mask the coordination between them.

In the dirty work account each trader placed multiple non-bona fide “buy” or “sell” orders to create the upward or downward pressure on the price of the security. As market participants were drawn in by the orders, the price would start to move in the planned direction. Once the price moved as planned the trader would reverse course, cancel the trades in the dirty account and placing trades through the clean account in the opposite direction. Those trades captured the price movement generated by the dirty account trades. To facilitate the transactions Mr. Milrud had a game maker create a special key for the computers for the transactions.

To minimize the possibility of detection, Mr. Milrud instructed traders to use small quantities of relatively high-volume securities, to manipulate a wide variety of stocks and to only move the price a few cents. He also plugged into the system and monitored the trading in both the dirty and clean accounts.

Mr. Milrud met with an off-shore broker that had an office in New Jersey as part of the scheme. He illustrated his approach by showing the broker how the trading was conducted. A series of detailed schedules listing the trades is attached to the SEC’s complaint. Not mentioned in the SEC’s complaint, but in the papers for the criminal case, is the fact that a former broker is now a cooperating witness for the government.

The SEC’s complaint alleges violations of: Securities Act Section 17(a) and (c); Exchange Act Section 10(b) and Rule 10b-5(a) and (c); Exchange Act Section 9(a)(2); and control person liability under Exchange Act Section 20(b) along with joint and several liability under Section 20(a).