Securities and Exchange Commission v. Scott I. Kupersmith, et al., Civil Action No. 11-cv-6277 (KSH) (D.N.J.)


The Securities and Exchange Commission recently announced that on March 6, 2013, the Honorable Katharine S. Hayden of the United States District Court for the District of New Jersey entered a final judgment against defendant Scott I. Kupersmith. The final judgment imposes on Kupersmith a permanent injunction against future violations of certain antifraud provisions of the federal securities laws and orders that his obligation to pay disgorgement of $640,000 and prejudgment interest thereon be deemed satisfied provided that the combined restitution orders in the related criminal federal and state proceedings against him exceeded such amount.

In its Complaint, the Commission alleged that Kupersmith orchestrated a “free-riding” scheme of selling stocks before paying for them during 2009 and 2010 that allowed him to reap approximately $640,000 in illicit profits, while causing approximately $2 million in losses to the victim broker-dealers that he used to operate the scheme. According to the Complaint, Kupersmith interchangeably bought and sold the same quantity of the same stock in different brokerage accounts with the intention of profiting on swings up or down in the stock price. Unbeknownst to broker-dealers, Kupersmith did not have sufficient securities or cash on hand to cover the trades, and instead used proceeds from stock sales in one brokerage account to pay for the purchase of the same stock in another brokerage account. The scheme unraveled when Kupersmith failed to deliver shares to settle or cover long sales.

The final judgment permanently enjoins Kupersmith from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5 and 10b-21 thereunder. In addition, the final judgment orders that Kupersmith’s obligation to pay disgorgement of $640,000 and prejudgment interest thereon be deemed satisfied provided that he was ordered to pay restitution in excess of such amount on a combined basis in the parallel criminal proceedings against him. Kupersmith consented to the entry of the final judgment.

On May 29, 2012, Kupersmith pleaded guilty to federal criminal charges for securities fraud in a parallel criminal action before the District Court for the District of New Jersey in United States v. Kupersmith, 2:12-cr-00375 (D.N.J.). On March 4, 2012, Kupersmith was sentenced to 33 months in prison followed by three years of supervised release and ordered to pay $1,796,151 in restitution.

In a related state criminal action, on May 7, 2012, Kupersmith pleaded guilty to criminal charges, including securities fraud under New York penal law, before the Supreme Court of the State of New York for the County of New York in State of New York v. Scott Kupersmith et al., Ind. No. 04360/2011 (Sup. Ct. N.Y. County). On March 5, 2013, Kupersmith was sentenced to a one-to-three year state prison term to run concurrently with the federal prison sentence and ordered to pay $684,703 in restitution, including a five-percent administration fee.

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