Brothers Charged In Free Riding Scheme

Traders and investors are always looking for an edge, an approach that will give them to guaranteed or near guaranteed profits. When the edge is a new trading strategy, or a recently discovered bit of data that may point to a less risky approach to make more profits, it is fine. When, however, the edge involves deception it is a different matter. At that point it is contrary to the securities laws. The “edge” used by the traders in SEC v. Phan, Civil Action No. 4:22-cv-001 (M.D. Ga. Filed September 26, 2022) is called free trading; it seeks to take advantage of certain actions taken by some brokerage firms to facilitate trading, not provide riskless trading profits.

Defendants Sang Phan and Rich Phan are brothers residing in Columbus, Georgia. Sang is a former nail salon worked. Rich is a former restaurant and nail salon worked. During the first and second quarter of 2021 the brothers decided to implement a free riding scheme. That scheme sought to take advantage of the practice of certain brokerage firms which make “instant deposits” for investors — essentially credit extended to facilitate trading.

In this matter the brothers sought out brokers that made instant deposits, hoping to use the credit extensions to make trades and profit from the use of the broker’s funds. During the first and second quarter of 2012 the brothers used four brokerage accounts at two firms to purchase nearly $60,000 of shares in a biotech company. The idea was to profit from the pandemic from the stock by using the broker’s funds before the brokers discovered the scheme – that all the transactions would be funded only by the brokers and not the brothers. The brothers also sought to use over $30,0000 in securities purchases in Rich Phan’s online account in the same manner.

Fortunately, for the brokers involved, and unfortunately for the brothers, none of the trades were profitable. In each instance after the bogus fund transfers the brokers froze the accounts and liquidated the securities holding. Those steps left the brothers with over $12,800 in losses, not the hoped for riskless profits. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25522 (September 26, 2022).

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