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by Bill Singer

Online Hijacking Defendants Agree to Pay $1.33 Million to Settle SEC Market Manipulation Case

December 3, 2010

On March 15, 2010, the Securities and Exchange Commission (SEC) filed an emergency action in the United States District Court for the Southern District of New York seeking to freeze the assets of Defendants BroCo Investments, Inc. and its President Valery Matlsev before funds could be moved overseas. Securities and Exchange Commission v. BroCo Investments, Inc. and Valery Maltsev, Civil Action No. 10-cv-2217 (S.D.N.Y.). The SEC sought permanent injunctions against future violations by the Defendants and disgorgement of all ill-gotten gains, including prejudgment interest and civil penalties.

Cast of Characters

Defendant BroCa Investments, Inc. was formed in April 2008 and is located in St. Petersburg, Russia, according to account opening documents at Genesis, where BroCo maintains a securities trading account. According to the company's website, however, BroCo is located in Limassol, Cyprus.

Defendant Valery Maltsev is believed to be a thirty-six year old Russian citizen residing in or around St. Petersburg, Russia. According to account opening documents at Genesis, Maltsev is BroCo's president and only officer, and has sole trading authorization for BroCo's securities account.

Hijacked

The SEC's Complaint alleged that BroCo Investments, Inc., its president Valery Maltsev, and/or individuals acting in concert with them placed trades in online brokerage accounts at Scottrade, while simultaneously placing other, typically profitable sides of those unauthorized trades in their own account at Genesis Securities, LLC. The conduct was accomplished through the use of stolen usernames and passwords, and was deemed to constitute the hijacking of the unwitting investors' online brokerage accounts. The Defendants were charged with placing unauthorized trades through the compromised accounts to manipulate the markets of at least thirty-eight issuers between August 2009 and December 2009:

  1. 8x8 Inc.
  2. Active Power, Inc. 
  3. Akeena Solar, Inc. 
  4. Akorn, Inc. 
  5. Alliance Fiber Optic Products 
  6. Amcore Financial, Inc. 
  7. American Technology Corp. 
  8. AmeriServ Financial, Inc. 
  9. Ante4, Inc. 
  10. Antigenics, Inc. 
  11. Arotech Corp. 
  12. Biofuel Energy Corp. 
  13. BMB Munai, Inc.
  14. Catalyst Pharmaceutical Partners, Inc. 
  15. China Direct Industries, Inc.
  16. China INSOline Corp. 
  17. Clearfield, Inc. 
  18. Compton Petroleum Corp. 
  19. Comstock Homebuilding Companies, Inc. 
  20. Cybex International, Inc. 
  21. dELIA's, Inc. 
  22. EF Johnson Technologies, Inc. 
  23. Endwave Corporation 
  24. Enterra Energy Trust
  25. ExpressJet Holdings, Inc
  26. First M & F Corporation
  27. Icagen, Inc. 
  28. iGo, Inc.
  29. Magellan Petroleum Corp. 
  30. Majesco Entertainment Company 
  31. NewBridge Bancorp 
  32. Newcastle Investments Corp. 
  33. Parlux Fragrances, Inc.
  34. Rosetta Genomics,Ltd.
  35. Synthesis Energy Systems, Inc.
  36. Vestin Realty Mortgage II, Inc.
  37. WPT Enterprises, Inc.
  38. Xerium Technologies

In almost every instance, prior to intruding into these accounts, the Defendants acquired positions in their own account. Then, just minutes later, without the accountholders' knowledge, the Defendants, and/or individuals acting in concert with them, placed scores of unauthorized buy orders at above-market prices using the compromised accounts.

After these unauthorized buy orders were placed, the Defendants sold the positions held in their own account at the artificially inflated prices. In other instances, the Defendants profited by covering short positions previously established in their account while placing unauthorized sell orders through the compromised accounts at substantially lower prices.

The SEC alleged that the defendants' account activity artificially affected the share price and trading volume for each of the thinly-traded issuers and enabled the Defendants to sell their holdings at a substantial profit, realizing at least $255,532 in ill-gotten gains.  

Frozen Assets

Judge Richard J. Holwell granted the SEC's request to freeze the Defendants' assets pending a preliminary hearing. Thereafter, on June 17, 2010,  Judge Holwell entered a preliminary injunction against defendants BroCo and Maltsev. Among other things, the Court froze the defendants' U.S. assets and ordered the defendants to repatriate $400,000.  The Court found that there was a substantial likelihood that the SEC would prove that the defendants had participated in and substantially assisted fraudulent trading in Broco's account at Genesis Securities. Pointedly, the Court stated that

[T]here is ample evidence that Broco ignored obvious signs of fraud. [The subaccount] generated trading profits so large and so rapid that no reasonable executive could have believed that they were legitimate, at least not without receiving a remarkable and well-supported explanation. …

[The subaccount] achieved these results by consistently doubling and sometimes tripling or even quadrupling his subaccount balance in a single day's worth of trading. Even with leverage … those returns are unattainable in the real world. Examination of the pattern of daily trading also raises a strong inference of fraud.

. . .

Defendants did not require information about the Scottrade intrusions to appreciate the blatant signs of fraud [in the subaccount] - the absurd profits, the constant repatriations, and the daily trading patterns. Even if they were not aware of the Scottrade intrusions, defendants acted recklessly in failing to investigate those obvious red flags.

Amended Complaint and Settlement

According to an Amended Complaint filed on December 2, 2010, the SEC alleged that defendants BroCo and Maltsev controlled an omnibus account that was used to turn $2,080 into $627,633 in a six-month period by repeatedly buying and selling securities contemporaneously with unauthorized trades that had been placed in compromised accounts at various U.S. broker-dealers.

The Amended Complaint alleged that BroCo and Maltsev violated the antifraud provisions of the federal securities laws as a result of the fraudulent trading being conducted through their omnibus account; and that BroCo and Maltsev ignored several red flags that should have alerted them to the fraudulent activity, including the massive short term trading gains being realized in the account, internal memoranda that identified the suspicious trading, and the constant repatriation of funds.

Contemporaneously with the issuance of the Amended Complaint, the SEC announced that it had settled civil charges (subject to the Court's approval) against BroCo and Maltsev. In settling the SEC's charges without admitting or denying the allegations:

  • BroCo agreed to pay $627,633 in disgorgement plus prejudgment interest and a $627,633 penalty. BroCo also consented to the entry of a judgment that permanently enjoins the company from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
  • Maltsev agreed to pay a $50,000 penalty and consented to the entry of a judgment that permanently enjoins him from violating Sections 17(a)(2) and (3) of the Securities Act of 1933.

Forewarned is Forearmed

The SEC's Office of Investor Education and Assistance has posted a helpful online document:

Online Brokerage Accounts:
What You Can Do to Safeguard Your Money and Your Personal Information

at http://www.sec.gov/investor/pubs/onlinebrokerage.htm

The investor alert explains how online identity theft can occur, how you can protect your online information, and how to determine if your identity has been stolen.  Additionally, the SEC provides the following information:

What to Do if You Run into Trouble 

Always act quickly when you come face to face with a potential fraud, especially if you've lost money or believe your identity has been stolen.

Identity Theft. If you think that your personal information has been stolen, visit the Federal Trade Commission's Identity Theft Resource Center at www.consumer.gov/idtheft/index.html for information on how to file a complaint and control the damage. 
 

Securities Scams. Before you do business with any investment-related firm or individual, do your own independent research to check out their background and confirm whether they are legitimate. For step-by-step tips and links to helpful websites, please read Check Out Brokers and Advisers and SIPC Exposes Phony "Look-Alike" Web Site. Report investment-related scams to the SEC using our online Complaint Center. 
 

Phishy Emails. If a phishing scam rolls into your email box, be sure to tell the company right away. You can also report the scam to the FBI's Internet Fraud Complaint Center at www.IFCCFBI.gov. If the email purports to come from a brokerage firm or mutual fund company, be sure to pass along that tip to the SEC's Enforcement Division by forwarding the email to enforcement@sec.gov. 

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