by T. GormanPosted on Posted in SECActions

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).

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by T. GormanPosted on Posted in SECActions

Five executives took advantage of their employer’s weak internal controls to repeatedly misappropriate funds, causing a loss of over $11 million over a four year period beginning in 2008. The scheme was discovered when a firm executive reported it to the CEO and CFO of the company, precipitating an internal investigation that lead to a restatement. SEC v. Shakouri, Civil Action No. 2:17-cv-01929 (C.D. Cal. Filed March 10, 2017).

The action charges five former executives of iPayment: Nasir Shakouri, senior vice president of sales and marketing; Robert Torino, at one point executive vice president and COO; Bronson Quon, vice president and corporate controller; John Hong vice president of information technology; and Jonathan Skarie, assistant vice president of merchant operations. The company provides credit and debit card payment processing services to small merchants. In May 2011 the firm completed debt offerings, registering notes with the Commission.

The scheme had three key facets:

Expense reimbursement: Beginning in February 2008, and continuing over essentially the next four years, Messrs. Shakouri and Torino, assisted by others, obtained what appeared to be reimbursements from the company totaling over $2.4 million for amounts supposedly paid to third party vendors. Firm policy at the time permitted executives to incur expenses on their personal credit cards and obtain reimbursement. Most of the fraudulent charges involved the claimed purchase of equipment supposedly from Dell computer. For example, Mr. Shakouri claimed to have made nine purchases of equipment totaling about $1.3 million. He submitted requests for repayment which were honored. Mr. Torino obtained about $350,000 of claimed reimbursements based on four fake invoices for Dell computer equipment. In addition to the Dell invoices, other fake invoices and credit card receipts were submitted to the firm to obtain reimbursements that were fraudulent.

Kickback scheme: Beginning in April 2011, and continuing for over a year, Messrs. Shakouri, Torino and Hong caused the company to significantly overpay certain vendor invoices. The overpayments, totaling millions of dollars, went to them. The scheme was implemented with the assistants of Individual A and Individual B, vendors that had a close relationship with Defendants Shakouri and Torino. Individuals A and B were provided certain IT services to the Company. The invoices were inflated. The inflated portions was kicked back to the executives.

Merchant fraud schemes: Messrs. Shakouri and Torino, assisted by others, defrauded the firm of over $6.1 million through various schemes which essentially secured the payment to themselves of certain sums related largely to the firm’s merchant accounts by falsifying the books and records. iPayment obtained merchant accounts in two ways: 1) through its salaried employees and 2) by referrals from a network of independent sales offices or ISOs. The former were house accounts. The latter were ISO accounts. On those accounts the firm paid the ISO a bonus for the account known as a residual.

Examples of these schemes include one utilized to obtain improper payments involving the discontinued merchant program. That program sought to re-sign merchants that stopped doing business with iPayment. Essentially Messrs. Torino and Shakouri caused the company books and records to be falsified in such a manner that about 40 active house accounts were reclassified as discontinued merchant accounts and that were then re-signed, generating the payment of a residual that went to the executives. A variation of this scheme involved Online Data Corporation, a division of iPayment. Messrs. Shakouri and Torino caused the house accounts at Online Data be reclassified as ISO accounts to claim the residual due after they were re-signed.

Following the internal investigation five material weaknesses were discovered in the firm’s internal controls: 1) entry level controls were not effectively designed or applied to prevent senior management from circumventing or overriding them; 2) accounts payable controls were not adequately designed; 3) the firm failed to maintain effective controls regarding the verification of ISOs; 4) personal credit cards were used for purchases rather than a centralized purchasing system; and 5) effective policies and procedures were not in place regarding the use of manual journal entries and which required adequate supporting documentation.

The complaint alleges violations of Exchange Act Sections 10(b), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 15(d) and 20(e) and Securities Act Section 15(b). The action is in litigation. A parallel criminal action was filed by the U.S. Attorney’s Office for the Central District of California against Messrs. Shakouri and Torino. See Lit. Rel. No. 23775 (March 10, 2017).

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