SEC secures Court order against trader engaged multimillion-dollar market manipulation scheme
The Securities and Exchange Commission (SEC) has obtained a Court order against David O’Brien for his participation in a multimillion-dollar market manipulation scheme.
On May 25, 2023, Judge Denise L Cote of the New York Southern District Court signed an order imposing heavy penalties on the defendant. According to the order, seen by FX News Group, O’Brien must disgorge $5,197,322 and to pay a civil penalty of $10,315,065.
According to the SEC’s complaint, between September 17, 2015 and at least October 29, 2020,
O’Brien, a securities trader, engaged in an ongoing market manipulation scheme involving what the complaint calls “coordinated trading events.”
O’Brien engaged in a manipulative scheme in which he used helper accounts to affect artificially the price of various stocks to the benefit of the winner accounts. In doing so, O’Brien acted with the intent to induce other market participants to fill orders at the artificially inflated or deflated prices.
According to the complaint, O’Brien executed over 18,000 coordinated trading events in eighteen accounts at fourteen different brokerage firms.
For some of these events, O’Brien would start by placing several sell orders for a certain stock in the helper accounts. This would create the false appearance of sell interest in the stock, which would artificially decrease the stock’s price. Then, O’Brien would acquire larger positions in the same stock in the winner accounts at the artificially deflated price. Once the winner accounts finished buying the stock, O’Brien often cancelled remaining open helper account sell orders.
For other coordinated trading events, O’Brien began by acquiring a position in a stock in the winner accounts. Then, he would place a series of smaller buy orders for the same stock in the helper accounts to artificially increase the stock price. O’Brien would then liquidate the winner account positions at the inflated price and cancel remaining open buy orders in the helper account.
O’Brien aimed to generate profits for the winner accounts that were greater than the losses in the helper accounts.
Through his actions, O’Brien intended to induce market participants to sell to and purchase from the winner accounts at prices that were artificially impacted by the helper accounts.
O’Brien’s most active period of coordinated trading events occurred between mid-September 2015 and December 2016. During this time, he engaged in 11,738 coordinated trading events using ten accounts at eight brokerage firms. About 75% of O’Brien’s coordinated trading events during this time resulted in net profits. Even deducting the net-unprofitable coordinated trading events, O’Brien still obtained an overall net gain during this period.
O’Brien attempted to hide his coordinated trading activity by executing the winner and helper trades in accounts held at different brokerage firms. Nonetheless, several of the firms O’Brien used for his scheme identified his activity as potentially manipulative trading and sent warnings to him that explained relevant concepts of prohibited manipulation.
For example, in October 2015, one firm identified an apparent “wash trade” by O’Brien and explained to him that manipulative trading practices involve any trades that have the purpose of
“[c]reating or inducing a false, misleading, or artificial appearance of activity in the security” or “setting a price that does not reflect the true state of the market in the security.” These kinds of warnings also informed O’Brien that manipulative trading practices are serious violations of exchange trading rules that could result in regulatory penalties.
In March 2016, a different firm contacted O’Brien about potential “layering” in his account. The firm stated that layering was a manipulative trading practice.
At least one firm also asked O’Brien directly whether he engaged in coordinated trading. The accounts that O’Brien used for coordinated trading events were often closed by brokerage firms.
When this happened, O’Brien would open new accounts at other firms in his or his wife’s name to continue the coordinated trading scheme.
O’Brien never disclosed his coordinated trading when brokerage firms asked about his trading activity. For example, one firm’s compliance department asked the firm’s branch manager to contact O’Brien to discuss his trading activity.
Finally, O’Brien continued to engage in coordinated trading even after learning that the SEC was investigating him. The SEC subpoenaed O’Brien in May 2018 relating to his trading activity.
He provided a proffer to the SEC and criminal authorities in August 2018. In May 2019, the SEC subpoenaed him a second time to provide testimony. O’Brien refused to appear for testimony, and thus in October 2019, the SEC filed a subpoena enforcement proceeding. He was ordered to testify in December 2019. Despite these ongoing proceedings, O’Brien continued to engage in coordinated trading through at least October 2020.
In determining the size of the penalties, the Judge noted that O’Brien’s conduct was egregious. His scheme was complex, required careful planning to execute, and consisted of over 18,000 discrete events of coordinated trading. Likewise, the facts showing O’Brien’s scienter were found to be palpable.