The SEC prevailed in a cross-border market manipulation scheme keyed to a layering technique that generated more than $25 million in illicit profits. The firm, Avalon FA Ltd., is based in Kiev, Ukraine and controlled by defendants Nathan Fayyer and Sergey Pustelnik. SEC v. Lek Securities Corporation, Civil Action No. 17-cv-1789 (S.D.N.Y. Verdict Nov. 12, 2019).
The action centered on trading by Avalon FA Ltd. through Lek Securities Corporation. Avalon is a Seychelles entity based in Kiev, Ukraine, according to the Commission’s complaint. The firm was a day-trader that uses mostly foreign traders. During the period of this action the trading firm had an account at Lek Securities, a New York City registered broker-dealer.
Avalon began implementing a manipulative scheme through its account at Lek in 2010. The scheme used spoofing or layering to generate profits of $21 million over a period of about six years. Spoofing or layering involves the use of non-bona fide orders for a particular security placed to move the price in a specific direction. Those orders inject false information into the market place because they appear to be actual transactions when in fact they are not. The non-bona fide orders essentially create a false trend in the market in one direction, either moving the share price up from purchases or down from sales, to the detriment of other traders. As the market moved Avalon would take advantage of the price changes to place profitable orders in the opposite direction. The non-bona fide orders were then cancelled. This yielded trading profits for Avalon at the expense of other traders who entered into transactions at what were essentially artificial prices.
The trading approach varied at times. Essentially it operated as follows: 1) multiple and increasingly higher non-bona fide orders to buy a stock would be placed; simultaneously orders the firm intended to execute were placed in the opposite direction; 2) the buy orders helped to increase interest on that side of the market; 3) the apparent buying trend resulted in purchases, portions of which were from Avalon sales – the firm sold at higher prices than were otherwise available; 4) once the bona fide sell orders were executed all of the outstanding non-bona fide buy orders were cancelled; 5) frequently Avalon would then reverse the strategy.
The jury returned a verdict finding that the Defendants violated Securities Act Section 17(a)(1) and (3) and Exchange Act Section 10(b). In addition, Messrs. Fayyer and Pustelnik were found to be control persons within the meaning of Exchange Act Section 20(a). The Court will consider the question of remedies following briefing.
Lek Securities Corp., a brokerage firm which employed Mr. Pustelnik, previously settled with the Commission. The agency alleged that the broker made the manipulations possible, by giving Avalon access to the markets, improving the technology used and relaxing its layering controls following a complaint from the trader.