Two traders arrested over alleged manipulation of more than 2,000 stocks
Joseph Taub and Elazar Shmalo allegedly used dozens of accounts at several brokerage firms in bouts of manipulative trading activity.
Two New Jersey-based traders were arrested on Monday for allegedly manipulating prices of more than 2,000 New York Stock Exchange- and Nasdaq-listed shares resulting in more than $26 million in illegal profits over a two-year period.
Regulators, law enforcement, and the exchanges use technology to see, and track, manipulative trading that, in this case happened more than 23,000 times and often lasted just a few minutes. Joseph Taub, 37, of Clifton, New Jersey, and Elazar Shmalo, 21, of Passaic, New Jersey sometimes controlled at least 80% of the volume of a targeted stock and traded in several accounts simultaneously, the regulators said.
The scheme, says the Securities and Exchange Commission and the U.S. Attorney’s office in New Jersey, was sophisticated. Taub, a registered broker, and Shmalo, who is unemployed, allegedly coordinated trading in more than $10 billion worth of securities in dozens of brokerage accounts.
Taub and Shmalo, and additional unnamed conspirators, relied on pre-arranged and coordinated trading among dozens of brokerage accounts they controlled, according to the SEC and DOJ. Taub, according to the SEC and DOJ, was the ring leader, funding many of the accounts that were not in his name and using two companies he controlled , EAC Capital LLC and LNW Direct LLC, to make some of the trades. Some accounts were held in the Taub and Shmalo names while others were in the names of family members. Many of the accounts were “straw” accounts, opened in the names of individuals who neither controlled the accounts nor traded the securities in an attempt to conceal the scheme from regulators and law enforcement.
The trading allegedly was carefully coordinated, using the “helper” account to place multiple small orders in a stock to create upward or downward pressure on the stock price. The “winner” account was primarily used to purchase and sell larger quantities of stocks at prices that had been affected by the manipulative orders in the helper account. The helper and winner accounts were almost always held at different brokerage firms.
Brokerage firms frequently questioned Taub and Shmalo about apparently manipulative trading patterns in the accounts such as wash trades, spoofing, and/or layering and sometimes closed the accounts. Layering is when a trader places non-bona fide orders to buy or sell securities in order to move the price of a security up or down and then quickly cancels them before they are executed. A wash trade allows the trader to create the illusion of volume by simultaneously selling and buying the same stock. Spoofing is when a non-bona fide orders are entered to encourage other traders to place orders that the original trader can exploit after canceling the fake order and entering an order on the opposite side of the market.
When brokerage firms closed the accounts after suspecting illegal manipulation, Taub and Shmalo simply switched to new firms and opened new accounts in other “straw” names. They also put off the inquiries by pretending to be unaware of the violations, in one case apologizing and saying “I’ll make sure it doesn’t happen again.”
Taub and Shmalo are each is charged with one criminal count of conspiracy to commit securities fraud which carries a maximum potential penalty of five years in prison and a fine the greater of $250,000 or twice the gain derived from the offense or twice the loss caused by the offense. The two men are scheduled to appear before U.S. Magistrate Judge Steven C. Mannion in Newark federal court.
The SEC did not identify an attorney yet for either man. The SEC charges Taub and Shmalo with violating and aiding and abetting federal securities laws and sought a return of the illegal profits plus interest and penalties.
Article and media originally published by Francine McKenna at marketwatch.com