Two Florida men caused up to 20 broker-dealers $2 million in losses through an alleged scheme that involved an illegal “free-riding” scheme of selling stocks before they paid for them.
Two Florida men pretending to be money managers caused up to 20 broker-dealers $2 million in losses through a scheme that involved an illegal “free-riding” scheme of selling stocks before they paid for them.
The Securities and Exchange Commission said Scott Kupersmith and Fredrick Chelly made about $600,000 in illicit profits engaging in illegal free-riding by interchangeably buying and selling the same quantity of the same stock in different accounts — frequently on the same day — with the intention of profiting on swings up or down in the share price. Unbeknownst to broker-dealers, the pair did not have sufficient securities or cash on hand to cover the trades, and they instead used proceeds from stock sales in one brokerage account to pay for the purchase of the same stock in another brokerage account. When the pair could not cover their sales, the broker-dealers had to settle those trades and incurred the losses, the SEC said.
The broker-dealers were identified in the SEC complaint filed today in U.S. District Court in New Jersey only as “Brokerage A” through “Brokerage T” and by the city in which they are located.
Mr. Kupersmith and Mr. Chelly traded through special accounts called delivery-versus-payment/receipt-versus-payment, or DVP, accounts, which brokers offer to customers with the understanding that clients have securities and cash held at a third-party custodial bank to cover trades the customer makes in the account.
The men, who purported to be money managers for hedge funds or private investors, also used offshore accounts to conduct the trading scheme, the SEC said.
“Kupersmith and Chelly engaged in a classic ‘heads, I win; tails, you lose' scheme to trade risk-free at the expense of broker-dealers,” said George S. Canellos, director of the SEC's New York office.
Mr. Kupersmith and Mr. Chelly operated the scheme in 2009 and 2010. There are no known attorneys for either of the men, the SEC said. Mr. Kupersmith also was charged criminally by the U.S. Attorney's Office for the District of New Jersey and the Manhattan District Attorney's Office.
Though both were Florida residents, Mr. Kupersmith, 46, lived in New Jersey and Mr. Chelly, 42, lived in New York at the time of the scheme, according to the SEC complaint, which seeks to stop the trading schemes, and orders them to pay unspecified restitution and fines. Neither Mr. Kupersmith nor Mr. Chelly could be reached for comment.
The broker-dealers where the pair opened accounts involved in the trading scheme include: New York and Purchase, N.Y., Short Hills and Morristown, N.J., Greenwich, Conn., Memphis, Tenn., Boise, Idaho, Chicago, Ft. Lauderdale, Fla., and San Francisco, Los Angeles, Newport Beach and Roseville, Calif., according to the SEC.
Locust Offshore Fund
In an unrelated case, the SEC alleged that money manager Andrey Hicks, 27, and his Cambridge, Mass., investment advisory firm, Locust Offshore Management LLC, made false representations to several investors from whom he raised $1.7 million.
Mr. Hicks solicited 10 investors for his purported $1.2 billion dollar quantitative hedge fund, Locust Offshore Fund Ltd., but he really put investor money into his own bank accounts for his personal use, the SEC said.
Among the lies Mr. Hicks told investors, he said he had undergraduate and graduate degrees from Harvard University and that he previously worked for Barclays Capital, the SEC said.
A judge from the U.S. District Court in Massachusetts ordered an asset freeze against Mr. Hicks, his firm and the fund. The SEC said there are no known defense attorneys in this case. Mr. Hicks could not be reached for comment.
