SEC Halts Option Trader Who Left Brokers With Losses
In many of the enforcement actions brought by the Commission the losses suffered from the fraudulent scheme are suffered by the unsuspecting and inexperienced investor who is taken in by a series of false statements – the typical offering fraud action. Seldom is the person with the huge loss the broker. Not so in the latest enforcement action brought by the agency. There the losses incurred from an ineffective trading system went to the broker. SEC v. Batra, Civil Action No. 2:21-cv-00434 (C.D. Cal. Filed Jan. 15, 2021).
Defendant Abhi Batra is a trader based in Los Angeles. While he apparently traded frequently, he was often not successful. The trading scheme he executed over a four-year period beginning in 2016, generally suffered losses. He however had profits; the brokers took the losses.
At first Mr. Batra traded through seven brokerage accounts in his name. After the accounts were set-up he arranged to fund them by transferring cash from his bank account by Automated Clearing House or ACH transfers. Typically, he would trade options. If the trade lost money he would cause his bank to retract the transfer of funds to the broker by falsely claiming it was unauthorized. This left the brokerage firm with the loss from the trade.
In February 2018, for example, $55,000 was transferred to Broker A by Defendant. Mr. Batra then purchased options on two different stocks. The trades were not profitable. Defendant then called his bank and falsely claimed that the ACH transfer was not authorized. When the transfer was retracted the broker was left with $54,000 in losses.
Mr. Batra used the same technique in some instance even when the trade was profitable. For example, at Broker B Mr. Batra purchased options on another stock. The account had been funded with another ACH transfer of cash. The trade was profitable. Defendant then withdrew the profits. Later he also retracted the ACH transfer, again claiming it was fraudulent and unauthorized.
Using the approach illustrated by the two examples above, between 2016 and early 2020 Mr. Batra purchased over $8 million is securities through 44 accounts at 14 different brokers.
As brokers came to understand the scheme Mr. Batra employed – known as “free-riding” — Defendant altered his approach. By March 2018 he had switched to nominee accounts not in his name for his scheme. In less than two years he opened 32 more accounts. About $900,000 was deposited into the accounts using ACH transfers. Subsequently, the transfers were retracted as a result of Defendant’s misrepresentations.
Over the four year period brokers suffered $665,000 in losses from Defendant’s free riding scheme. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25012 (Jan. 19, 2021).