SEC Settles Spoofing, Unregistered Broker Charges

by Dorsey & Whitney LLP

High speed trading and its impact on the markets is the topic de jour. Author Michael Lewis claims the markets are “rigged,” a statement which no doubt will help sell his latest book centered on high speed trading. Now the trading technique, which has been a large part of the markets in recent years, is the focus of investigations. The FBI is conducting a criminal probe. The Attorney General says the practice is being investigated. New York Attorney General Eric Schneiderman is continuing his probe of insider trading 2.0 which apparently includes high speed trading.

SEC Commissioners have mentioned the topic at various points but not acknowledged an investigation. The Commission did file a settled market manipulation case at the close of last week, tied to unregistered broker and failure to supervise charges. The manipulation was not high speed trading. Rather, it was a more traditional form of market manipulation known as “spoofing” or “layering.” In the Matter of Visionary Trading LLC, Adm. Proc. File No. 3-15823 (April 4, 2014).

The Visionary Trading Order names as Respondents the firm; its four owners, Joseph Dondero, Eugene Giaquinto, Lee Heiss and Jason Mdevin; and Lightspeed Trading LLC, a registered broker dealer, along with its COO, Andrew Actman.

Mr. Dondero, one of the owners of Visionary, is alleged to have engaged in manipulative trading in violation of Exchange Act Sections 9(a)(2) and 10(b). In 2009 he employed a practice known as “layering” or “spoofing.” The technique combines actual trades with non-bona fide orders –essentially false statements since the order is put in the market place with no intent to execute it – and the use of trades which are displayed and those which are not.

In this action the Order alleges that Mr. Dondero would place buy or sell orders that he intended to have executed, then immediately entered numerous non-bona fide sell or buy orders to attract interest to the bona fide orders he wanted executed. The non-bona fide orders were designed to induce others to execute against the initial order. Once the bona fide order was executed the others were canceled.

The orders were typically placed in layers and the technique repeated until executions were obtained at a favorable price. The trading technique, frequently conducted for securities with wide spreads in thin markets, would cause a price distortion or movement favorable to the trader. Once the trading ceased the market price would revert to its pre-layering competitive level. Utilizing this technique Mr. Dondero obtained profits of $984,398.

Other charges, which are the focus of the proceeding, stem from an arrangement involving Visionary Trading. Beginning in May 2008, and continuing through November 2011, the firm’s owners and others engaged in day trading from its offices in New Jersey. Lightspeed was the broker. In connection with that trading two registered representatives of the firm shared their transaction based compensation with Visionary and its owners. Over the period Lightspeed retained about $330,000 in commissions but paid out about $474,407.

In connection with the fee splitting arrangement the Order alleges that: 1) Visionary and its owners violated Exchange Act Section 15(a)(1); 2) that Lightspeed and Mr. Giaquinto aided and abetted and caused Visionary’s and its owner’s violations of Section 15(a)(1); 3) that Lightspeed failed to reasonably supervise Mr. Giaquinto; and 4) that Mr.Actman failed to reasonably supervise Mr. Giaquinto.

Each of the Respondents resolved the proceeding by consenting to the entry of a cease and desist order based on the Sections cited in the Order as to them. Lightspeed was also censured. In addition, Messrs. Giaquinto, Heiss and Medvin were barred from the securities business and from participating in any penny stock offering with a right to apply for reentry after two years. Mr. Dondero was also barred from the securities business or from participating in any penny stock offering. Mr. Actman was barred from association in a supervisory capacity in the securities business with a right to apply for reentry after one year.

Lightspeed agreed to pay disgorgement of $330,000, prejudgment interest and a civil penalty of $100,000 plus agreed upon post-Order interest of $308.22. Respondents Giaquinto, Hess and Medvin will pay disgorgement of $118,601 plus prejudgment interest and a civil money penalty of $35,000 each. Respondent Dondero will pay disgorgement of $1,102,999.96, prejudgment interest and a civil penalty of $785,000. Mr. Actman will pay a civil money penalty of $10,0000 plus agreed upon post-Order interest of $46.23.

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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