Offering Frauds and Free Riding

Offering fraud actions seem to be everywhere. These schemes prey on people looking for good investments and frequently take advantage of the investor’s zeal to find a good, profitable investment for his or her funds. In the end, of course, it the investor who looses much if not all of his or her money since typically the scheme is all to often nothing but a fraud.

The reverse of these kinds of deals is a free riding scheme. There, a market professional such as a broker-dealer is often the victim. The scheme begins with a broker offering new clients “instant credit.” This happens when a new client claims he or she will transfer assets from an existing account to a new account at the brokerage firm. Once the transfer is supposedly made – all on paper — the broker permits the new client to trade in the newly opened account using the proceeds from the just made paper transfer.

The problem is the transferred assets have not yet arrived. In fact, under normal circumstances the assets may not actually arrive for a short period. Accordingly, the new client is actually trading on credit extended by the broker. If the trades are successful the new client attempts, and often does, take the assets out and leave; if the trades are a loss, the new client vanishes. The new client wins, or at least leaves, with no loss. The broker takes the loss. The Commission’s latest case in this area is SEC v. Lacy, Civil Action No. 24-cv-1145 (M.D. Fla. Filed May 13, 2024).

Named as a defendant in this case is Tyrone Johnny Lacy, Jr., a 25 year-old resident of Seffner, Florida. He was employed as a warehouse and backroom employee for several retailers and a consumer electronics distributor.

Over a short period in October 2022 Mr. Lacy engaged in what was essentially a free riding scheme with two brokers. With each broker Mr. Lacy first initiated electronic deposits from his bank accounts into the two brokerage firms where he had established an account. For example, with one broker Mr. Lacy falsely represented his profession, salary and the amount of cash he had. He then made a $270,000 unfunded deposit with the broker. Based on the so-called deposit, he purchased $330,000 of equity, exchange-traded securities. The trade was a loss – the firm had a loss of over $1,500 on the unfunded trade; Mr. Lacy, however, withdrew $1,600 before the phony unfunded money transfer was reversed. Similar conduct was undertaken with the other broker. One broker had a loss of about $1,500. The complaint alleges violations of Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 26004 (May 13, 2024).

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