LAWFUEL – Investment Law News – Late yesterday evening the SEC obtained a federal court order directing a $3 million freeze of certain assets at a U.S. brokerage firm — by far the largest freeze obtained in an intrusion-related market manipulation scheme. The assets reside in an omnibus brokerage account whose owners are located in Russia, Lithuania, Latvia and the British Virgin Islands. The omnibus account is in the name of JSC Parex Bank, a Latvian financial institution and relief defendant in the SEC action.
As part of the scheme, the unknown traders hacked into unsuspecting investors’ online brokerage accounts, selling off investors’ positions and using the proceeds to pump up the market for the stocks subject to the scheme. Through this technique, the unknown traders generated at least $732,941 in illicit profits and cost U.S. brokerages some $2 million in losses. The perpetrators of this scheme manipulated the price of fifteen (15) different NASDAQ stocks, unlawfully intruding into close to forty (40) different brokerage accounts including customers of Charles Schwab, E*Trade, Fidelity, Merrill Lynch, Scottrade, TD Ameritrade and Vanguard.
FOR IMMEDIATE RELEASE 2007-
SEC OBTAINS ORDER FREEZING $3 MILLION IN PROCEEDS OF SUSPECTED FOREIGN-BASED ACCOUNT INTRUSION SCHEME
Washington, D.C., March 7, 2007 – The Securities and Exchange Commission today announced that on Tuesday, March 6, 2007, it won an emergency court order freezing assets in a Latvian-based bank’s trading account being used to conduct a hi-tech market manipulation scheme. The Commission’s enforcement action is the third filed in as many months involving market manipulation schemes conducted through online account intrusions.
In an emergency federal court action filed in the United States District Court for the District of Columbia, the Commission alleged that the account, maintained by relief defendant JSC Parex Bank based in Riga, Latvia, had been used by one or more unknown offshore sub-account holders to launch a “pump and dump” manipulation scheme involving the stocks of fifteen different public companies. As part of the scheme, the unknown traders hacked into unsuspecting investors’ online brokerage accounts at seven different brokerage firms, selling off investors’ positions and using the proceeds to pump up the market for the stocks subject to the scheme. Through this technique, the unknown traders generated at least $732,941 in illicit profits and cost U.S. brokerages some $2 million in losses.
In response to the Commission’s motion, the Court issued a temporary restraining order freezing the defendants’ fraudulent profits held in JSC Parex’s omnibus trading account.
SEC Enforcement Deputy Director Peter Bresnan stated, “In today’s global economy, where con artists can misuse computer technology to defraud innocent U.S. investors from far beyond our borders, freezing the unlawful profits of those behind these intrusion schemes is especially important. Working to prevent injury to U.S. investors from intrusions into online brokerage accounts is a top priority of the Enforcement Division.”
“Using sophisticated computer hacking and identity theft techniques to break into the accounts of innocent online brokerage customers,” said SEC Office of Internet Enforcement Chief John Reed Stark, “these perpetrators effectively cut out the middleman of the old fashioned pump-and-dump scheme, eliminating phony stock promotions, creating their own artificial trading demand, and consummating their frauds in as little time as a couple of hours.”
The Commission’s complaint alleges a complex scheme that combines electronic intrusions into online brokerage accounts with a traditional market manipulation. From at least December 2005 through December 2006, one or more foreign-based unknown traders purchased, through four sub-accounts of an omnibus trading account titled in the name of Relief Defendant JSC Parex Bank and held at Pinnacle Capital Markets LLC of North Carolina, shares in 15 U.S.-based Nasdaq-traded companies. These unknown traders then hacked into unsuspecting investors’ online brokerage accounts at seven major online broker-dealers and sold off investors’ existing securities holdings. They then used the proceeds to buy shares on the open market of the thinly traded issuers the unknown traders had previously purchased in their own sub-accounts. This illicit account activity artificially heightened the share price and trading volume for each of the thinly traded issues and enabled the unknown traders to sell their holdings at a substantial profit, realizing at least $732,941 in ill-gotten gains, and possibly more. The unknown traders also used electronic means to hide their identities and mask the means by which they intruded into accounts.
The Commission’s complaint further alleges that the unknown traders violated 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 and seeks permanent injunctions against future violations by the unknown traders, and disgorgement of all the unknown traders’ ill-gotten gains, including prejudgment interest and civil penalties. The complaint also seeks a final judgment requiring Parex to disgorge any assets it may have obtained as a result of the unknown traders’ scheme.
The SEC’s Office of Investor Education and Assistance has issued an investor alert, which is available on the SEC’s website, that provides tips for avoiding becoming a victim of an intrusion. See http://www.sec.gov/investor/pubs/onlinebrokerage.htm.
The Commission acknowledges the assistance of the NASD in this matter.