SEC Files Fraud Charges Centered on Retail Accounts

Last week the co-director of SEC Enforcement discussed the Retail Strategy Task Force which will focus on the protection of retail investors. This week the Commission announced a case involving the intrusion into at least 110 retail accounts by stock manipulators. SEC v. Willner, Civil Action No. 1:17-cv-06305 (E.D.N.Y. Filed Oct. 30, 2017).

Defendant Joseph Willner is a day-trader. He coordinated with an unidentified person called Individual A. Over a two year period beginning in January 2014 Mr. Willner and Individual A repeatedly manipulated the share price of stocks using two sets of accounts. One group belonged to Mr. Willner. The second group were retail investors whose accounts were used without authorization by Individual A. Over the period the two traders reaped about $700,000 in trading profits.

To generate gains Individual A would access retail accounts without permission. He would then cause the accounts to place orders to either artificially raise or lower the price of select stocks. Mr. Willner would then execute trades on the opposite side through his accounts. In exchange for participating in the scheme Individual A received half of the trading profits.

To coordinate and conceal their activities Mr. Willner disguised his real identity when communicating with Individual A. He did this by using a pseudonym. He accessed the direct messaging applications using the pseudonym but with the IP address associated with his primary residence. In order to try and mask the payments to Individual A, Mr. Willner transferred proceeds from profitable trades to a digital currency company that converted U.S. dollars to bitcoin. The payment was then made to Individual A in bitcoin.

The stocks manipulated were at times penny stocks and at times not. Frequently transactions were undertaken either before or after the market opened or closed. At other times the trades were placed during the regular trading day. For example, on May 17, 2016 Individual A caused a victim’s account to purchase shares of Lawson Products, Inc. during regular market hours at increasing prices and in a manner that did not reflect supply and demand. Mr. Willner then sold the stock short at the artificially high prices. Individual A then sold the stock causing a price drop. Mr. Willner was able to purchase the shares to cover his short position at lower prices, netting the two traders a profit. The same types of trades were placed prior to the opening of the market and after its close. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 9(a)(2) and 10(b). The case is pending. The U.S. Attorney’s Office for the Eastern District of New York filed a parallel criminal action.