Co-Owner of an Unregistered New Jersey Brokerage Firm Settles “Spoofing” Charges

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The SEC filed a settled administrative proceeding against an owner of a New Jersey based brokerage firm for engaging in an illegal “layering” or “spoofing” scheme that resulted in unlawful profits of almost $1 million. See SEC press release.

Market manipulation always has been a high priority for the SEC’s Enforcement Division and encompasses a broad range of activities that distort the natural forces of supply and demand. “Layering” or “spoofing” manipulation schemes involve placing a series of non-bona fide orders and then immediately canceling the orders before they are executed. These schemes create the illusion of demand resulting in an artificial increase in the market price of a security. The activity generally spurs the interest of other investors who place orders—thinking that the stock is “hot” and the increased activity is legitimate. After the manipulator stops entering orders, the price of the security usually returns to the previous price and the investors who traded are left with a security that is worth substantially less than they anticipated.

The SEC charged Joseph Dondero, a co-owner of Visionary LLC, with violating Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC found that from May 2008 through November 2011, Dondero placed hundreds of thousands of orders with the intent to change the National Best Bids and National Best Offers of specific securities. The SEC also found that Dondero canceled approximately 90% of those orders. Moreover, the SEC found that Dondero’s alleged manipulative trading accounted for almost 100% of his profitable trading. In addition to market manipulation, the SEC charged Dondero with violating Section 15(a)(1) of the Exchange Act by operating Visionary as an unregistered broker-dealer. According to the SEC Order, Dondero (and others) solicited Visionary customers to engage in securities trading and received transaction-based compensation related to that trading.

In connection with the settlement, Dondero agreed to disgorge his profits, along with prejudgment interest and a civil penalty of $785,000 for a total payment of approximately $1.9 million.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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