SEC Charges N.Y.-Based Brokerage Firm With Layering
The Securities and Exchange Commission recently announced that it charged a New York-based brokerage firm and three executives for allowing traders outside the U.S. to access the markets and conduct manipulative trading through accounts the firm controlled.
The SEC’s investigation found that Hold Brothers On-Line Investment Services ignored red flags indicating that overseas traders were accessing the markets through the firm’s customer accounts and repeatedly manipulating publicly-traded stocks through an illegal practice known as “layering” or “spoofing.” In layering, the trader places orders with no intention of having them executed but rather to trick others into buying or selling a stock at an artificial price driven by the orders that the trader later cancels. Hold Brothers’ president and co-founder Steve Hold, former chief compliance officer and chief financial officer Robert Vallone, and a third executive William Tobias were aware of several e-mails and other indications that manipulative trading was occurring through Hold Brothers accounts, yet they failed to properly investigate the warning signs and recklessly continued to provide overseas traders with buying power and access to the U.S. markets.
The SEC also charged two Hold Brothers customers whose accounts were used for the manipulative trading. The two foreign companies – Trade Alpha Corporate Ltd. and Demostrate LLC – were created and partially owned by Steve Hold, so essentially Hold provided the capital for the manipulative trading by the overseas traders. The six individuals and entities charged in the SEC’s case agreed to pay a total of $4 million in disgorgement and penalties to settle the charges.
“Manipulation, whether executed by e-mail, instant message, or multiple phantom orders, is still manipulation,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Traders and the firms that provide them market access should not labor under the illusion that illegally layering orders amidst voluminous trading data will somehow allow them to evade detection by the SEC.”
Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit, added, “The fairness principle that underlies the foundation of our markets demands that prices of securities accurately reflect a genuine supply of and demand for those securities. The SEC will not tolerate any abusive practice that is designed to distort these natural forces.”
According to the SEC’s order instituting settled administrative proceedings, the manipulative trading occurred from at least January 2009 to September 2010. Hold Brothers’ primary business was to provide market access to its customers’ traders, a majority of whom were located overseas. The vast majority of these overseas traders traded for Trade Alpha and Demostrate.
According to the SEC’s order, the layering strategy used by the overseas traders typically followed the same pattern. Traders placed a bona fide order that was intended to be executed on one side of the market (buy or sell). The traders then immediately entered numerous non-bona fide orders on the opposite side of the market for the purpose of attracting interest to the bona fide order and artificially improving or depressing the bid or ask price of the security. The nature of these non-bona fide orders was to induce other traders to execute against the initial, bona fide order. Immediately after the execution against the bona fide order, the overseas traders canceled the open non-bona fide orders, and repeated this strategy on the opposite side of the market to close out the position.
The SEC’s order finds that Hold Brothers willfully violated Sections 9(a)(2) and 17(a) of the Securities Exchange Act of 1934 and Rules 17a-4 and 17a-8, and failed reasonably to supervise its associated persons, the overseas traders, with a view to preventing and detecting their violations. The order also finds that Demostrate and Trade Alpha violated Section 9(a)(2) of the Exchange Act. The order finds that each of the individual respondents willfully aided and abetted and caused each entity’s violations of Section 9(a)(2) of the Exchange Act, and that Steve Hold failed reasonably to supervise Vallone.
The SEC’s charges were settled without admitting or denying the findings:
Hold Brothers agreed to pay $635,000 in disgorgement and interest and nearly $1.9 million in penalties. The firm also agreed to a censure and to cease and desist from committing or causing any violations of Sections 9(a)(2) and 17(a) of the Exchange Act and Rules 17a-4 and 17a-8. Hold Brothers also settled to a finding that it failed reasonably to supervise the overseas traders.
Trade Alpha and Demostrate have agreed to pay more than $1.25 million in disgorgement and to cease and desist from committing or causing any violations of Section 9(a)(2) and 17(a) of the Exchange Act.
Hold, Vallone, and Tobias each agreed to pay $75,000 penalties and accept industry bars (three years for Vallone and Tobias and two years for Hold). They also agreed to cease and desist from committing or causing any violations of Section 9(a)(2) of the Exchange Act. Hold additionally agreed to be barred from acting in a supervisory capacity for a period of three years, which will run concurrently with his two-year industry bar.
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