SEC Case: Heads I Win, Tails You Lose

On Wall Street there is supposed to be a winner for every loser -- you know, two sides to every coin and a mirror image for every trade.  However, seems that a couple of would-be alchemists thought that they found a way to circumvent the physics of trading.  In the end, no cigar.

Get Your Scorecard

In a Complaint filed in federal court on March 9, 2010, the Securities and Exchange Commission (SEC) alleges that in October 2003, a Spanish Bank ("Bank") opened an account with Jose O. Vianna, Jr. ("Vianna"), then a broker with the Maxim Group, LLC, ("Maxim"). The purpose of this account was to effect proprietary trading for the Bank, and Vianna was designated the registered representative for the Customer A account.

In its promotional literature, Maxim describes itself as full-service investment banking firm headquartered in New York. Maxim provides a full array of financial services including investment banking; private wealth management; and global institutional equity, fixed-income and derivatives sales and trading as well as equity research. Maxim currently manages in excess of $5 billion in client assets. The investment banking group focuses on middle market and emerging growth companies within the shipping, energy, health care, technology, retail, and business and financial services sectors. The firm's institutional coverage North and South America, Europe and Asia.

Employee, a citizen and resident of Spain, was a portfolio manager employed by the Bank at its office in Madrid, Spain.  Employee was responsible for trading securities in the Bank's proprietary trading accounts, including the one maintained at Maxim.

At the end of April 2007, Employee referred Creswell Equities, Inc.("Creswell"), a British Virgin Islands corporation with an office in Geneva, to Maxim;  and on June 20, 2007, Creswell opened an account there.  Vianna was the registered person assigned to that account.Creswell gave Employee the discretion to direct trading in its Maxim account and paid Employee a fee for doing so. Although Vianna knew that Employee was directing trading in the Creswell account, Vianna did not inform Maxim of this fact.

Let the Good Times Roll (but reallocate the bad)

Starting in July 2007 and continuing until March 2008, acting in concert with Employee, Vianna carried out a fraudulent scheme to divert trading profits from the Bank to Creswell. 

On at least 57 occasions during that period, Vianna entered simultaneous orders in the Bank and Creswell accounts to trade the same number of shares of the same stock. In each instance, Vianna entered an order to buy the stock for the account of one customer and entered an order to sell the stock for the account of the other customer. The corresponding orders were for blocks of stock, ranging from 20,000 to 310,000 shares.  In each instance, Maxim executed the corresponding orders at the same price.

In 28 of the 57 instances in which Vianna entered corresponding orders for the Bank and Creswell accounts, the market moved so that the Bank's trade was profitable and Creswell's trade was unprofitable. Initially, that would be good news for the Bank; however, in each such profitable instance, Vianna improperly misused his access to Maxim's order management system to change the identity of the customer on each order so that the profitable trade was reallocated to Creswell's account and the unprofitable trade was reallocated to the Bank's account, thus causing Maxim's records to inaccurately reflect the account for which various orders were entered and transactions effected.

The Down And Dirty

NVLS 

• On July 17, 2007 at 10:19 a.m., Vianna entered a market order for the Creswell account to sell 60,000 shares of Novellus Systems Inc. (''NVLS'') and entered a market order to buy 60,000 .shares of NVLS for the Bank account.
• At 10:20 a.m., these market orders were executed by Maxim at $32.36 per share.
• Following the execution of these orders, the price of NVLS rose, generating unrealized trading profits for the Bank and unrealized trading losses for Creswell.
• At 1:37 p.m., Vianna entered a new order to sell 60,000 shares of NVLS for Creswell's account. This order was executed at 1:42 p.m. at $32.94 per share.
• At 1:52 p.m.,Vianna accessed Maxim's order management system and switched the customer accounts on the original 10:19 a.m. orders, so that Creswell became the buyer of 60,000 shares of NVLS at $32.36 per share and the Bank was transformed into the seller.
• Following the switch, Creswell was a buyer of 60,000 NVLS at $32.36 per share and a seller of those shares at $32.94 per share, realizing trading profits of almost $32,000. On the other hand, the Bank became a seller of NVLS at a price lower than the then current market price. 

FRE

• On November 20, 2007 at 8:56 a.m.,Vianna entered a limit order for Creswell's account to buy 100,000 shares of Freddie Mac (''FRE'') at $30.80 per share, and then immediately entered a limit order for the Bank's account to sell the same number of shares of FRE at the same price. Maxim executed both orders at $30.80 per share, the limit price.

• Following execution of the orders, the price of FRE declined, generating unrealized losses for Creswell.
• At 9:19 a.m., Vianna entered an order in Creswell's account to buy another 100,000 shares of FRE at the market price. Maxim executed this order at $28.99 per share.
• The price of FRE continued to decline, and at 9:25 a.m. Vianna entered another order in Creswell's account to buy 100,000 shares of FRE, which was executed at $27.07 per share.
• Minutes later, Vianna accessed Maxim's order entry system and reallocated Creswell's purchases of 100,000 FRE at $30.80 and 100,000 FRE at $28.99 to the Bank's account, and reallocated the Bank's sale of 100,000 FRE at $30.80 to Creswell's account.
• The net result of these trades was that Creswell sold 100,000 shares of FRE at $30.80 and bought 100,000 shares of FRE at $27.07 for a profit of over $367,000. The Bank bought 200,000 shares of FRE at above the then current market price. 

AAPL

• On March 3,2008, at 9:33 a.m., Vianna entered a market order in Creswell's account to buy 30,000 shares of Apple Inc. ("AAPL") and a market order in the Bank's account to sell 30,000 shares of AAPL. Both orders were executed at $125.37 per share.
• The market price of AAPL declined, resulting in unrealized losses for Creswell.
• At 9:46 a.m., Creswell purchased 30,000 shares of AAPL in its account at another broker-dealer for $123.68 per share.
• Within minutes of Creswell's purchase at the other broker dealer, Vianna accessed Maxim's order management system and reallocated Creswell's purchase of 30,000 AAPL at $125.37 to the Bank and reallocated the Bank's sale of 30,000 AAPL at that price to CreswelL
• The net result of these trades was that Creswell bought 30,000 shares of AAPL at $123.68 and sold 30,000 shares at $125.37, for a profit of over $45,000. The Bank purchased 30,000 shares of AAPL at $125.37, above the then current market price.

All Is Cress(Well) that Ends Cress(Well)?

In 29 of the 57 instances in which Vianna entered corresponding orders for the Bank and Creswell accounts, the market moved so that Creswell's original trade was profitable and the Bank's original trade was unprofitable: In each such instance, Vianna allowed the orders to remain as they originally had been entered.  Ahhh, but it's those aforementioned 28 other instances in which Cresswell's losing trades were amazingly reallocated to the Bank that make all the difference, and result in the present legal mess.

It is the SEC's allegation that Vianna entered the corresponding orders in the Creswell and the Bank accounts with the intention of misusing his access to Maxim's order management system to switch the account allocations for the original orders when the market moved against Creswell and in favor of the Bank. Vianna's purpose was to transfer all trading risk from Creswell to the Bank, so that Creswell would profit no matter which way the market moved. Creswell's corresponding trades with the Bank generated net profits of over $3.3 million for Creswell. Vianna also received at least $125,000 in commissions.

The Hardcore, Legal Mumbo Jumbo

The SEC alleges that Vianna is liable for violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §77q(a), and Section 10(b)  of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b),and Rule 10b-5 thereunder, 17 C.F.R.§ 240.10b-5; and for aiding and abetting Maxim's violations of Section 17(a) of the Exchange Act, 15 U.S.C. § 78q(a), and Rule 11a-3 thereunder; 17 C.F.R. §240.17a-3.

The SECs seeks permanent injunctive relief from Vianna, as well as disgorgement of ill-gotten gains plus prejudgment interest, and civil money penalties. The SEC's complaint also charges Creswell as a relief defendant, and seeks disgorgement of Creswell's illicit profits, plus prejudgment interest. On March 9, 2010, the Court entered an order temporarily freezing Creswell's assets pending a hearing on the SEC's application to freeze Creswell's assets for the duration of the action.

Bill Singer's Comment: Why the SEC's Complaint does not name the "Employee" is a bit baffling, particularly given his alleged complicity in the fraud.  Which is not to say that there may not be a number of reasonable explanations -- but it is to suggest that absolutely none of those explanations are offered in the Complaint or the press release.  If the purpose of not naming the Employee is to protect the identity of the similarly unnamed bank, then fine -- how about you just say that?

Given that the Bank appears to have been victimized, there is some fairness in not further trashing its name.  However, most folks would recognizee the Bank's victimization and you have to wonder if outing the guilty Employee would serve a greater civic purpose than protecting an institution under these circumstances.

NOTE: The above statements are merely allegations as contained in the SEC's Complaint and the Defendants are presumed innocent until proven guilty.

Securities and Exchange Commission v. Jose O. Vianna, Jr. and Creswell Equities, Inc., (Case No. 10 Civ. 1842 (GBD) (S.D.N.Y.), SEC Litigation Release No. 21446/ March 10, 2010)http://sec.gov/litigation/complaints/2010/comp21446.pdf