The Securities and Exchange Commission has charged a Ukrainian-based trading firm and a New York brokerage firm with fraud for their part in a layering manipulation scheme.
“The SEC’s complaint alleges that Avalon FA Ltd. touted itself to traders as a destination to engage in layering, a scheme in which orders are placed but later canceled after tricking others into buying or selling stocks at artificial prices, resulting in illicit profits. Avalon allegedly made more than $21 million in the layering scheme involving U.S. stocks during a five-year period,” a press release from the SEC stated.
“The SEC further alleges that Lek Securities and its owner Samuel Lek made the schemes possible by providing Avalon with access to the U.S. markets, approving the cross-market trading scheme, and improving its trading technology to assist Avalon’s trading. According to the SEC’s complaint, Lek Securities also relaxed its layering controls after Avalon complained. Avalon was the highest-producing customer for Lek Securities in terms of trading commissions, fees, and rebates generated.”
In the Summary portion of its Complaint, the SEC explained how the scheme worked: “The first manipulative trading scheme, known as ‘layering,’ involved manipulating the markets of U.S. stocks. Under this scheme, Avalon placed ‘non-bona fide orders’—in other words, orders that Avalon did not intend to execute and that had no legitimate economic reason—to buy or sell stock with the intent of injecting false information into the marketplace about supply or demand for the stock. Avalon did this to trick and induce other market participants to execute against Avalon’s bona fide orders (i.e., orders that Avalon did intend to execute) for the same stock on the opposite side of the market.”
Section 3 of the Summary continues, “The second manipulative trading scheme is referred to herein as the ‘cross-market manipulation,’ ‘cross-market scheme’ or ‘cross-market strategy.’ In this scheme, Avalon bought and sold U.S. stock at a loss for the purpose of moving the prices of corresponding options, so that Avalon could make a profit by trading those options at artificial prices that they would not have been able to obtain but for the manipulation. Avalon’s stock trades had no legitimate economic reason, and were intended to inject into the market false information about supply and demand in order to move the prices of corresponding options to artificial levels. Although the strategy involved taking a loss on the stock transactions, such losses were far outweighed by Avalon’s significant profits from trading the corresponding options whose prices Avalon had manipulated.”
Stephanie Avakian. Acting Director of SEC’s Division of Enforcement, said, “As alleged in our complaint, Avalon openly marketed itself as a destination for manipulative trading, and Lek Securities opened the gate to allow the schemes into the U.S. markets despite repeated warnings that its customer was manipulating the market.”
The scheme went on from December 2010 to September 2016 and Avalon made $7 million in illicit profits, according to the complaint.
The SEC press release concluded as follows: “After filing its complaint in U.S. District Court for the Southern District of New York, the SEC obtained an emergency court order freezing Avalon’s assets held in its account at Lek Securities as well as freezing and repatriating funds that Avalon has transferred overseas.”