UNITED STATES OF AMERICA
In the Matter of
ISRAEL M. SHENKER,
|ORDER INSTITUTING PROCEEDINGS|
PURSUANT TO SECTION 8A OF THE
SECURITIES ACT OF 1933 AND SECTION
21C OF THE SECURITIES EXCHANGE ACT
OF 1934, MAKING FINDINGS, IMPOSING
REMEDIAL SANCTIONS AND
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether Israel M. Shenker ("Shenker") violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and to determine the appropriateness of disgorgement.1
In anticipation of the institution of these administrative proceedings, Shenker has submitted an Offer of Settlement ("Offer") that the Commission has determined to accept. Solely for the purposes of this proceeding and any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, and prior to a hearing and without admitting or denying the findings set forth herein, except as to jurisdiction over him and over the subject matter of this proceeding, which Shenker admits, Shenker consents to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, Imposing Remedial Sanctions and Cease-and-Desist Order ("Order"). The Commission has determined that it is appropriate to accept Shenker's Offer and accordingly is issuing this Order.
Based on the foregoing, the Commission finds that:
Israel M. Shenker, age 24, is a self-employed investor living in Spring Valley, New York.
B. Shenker's Manipulation of the National Best Bid or Offer (NBBO)
The Limit Order Display Rule, Rule 11Ac1-4 under the Exchange Act (the "Display Rule"), requires a Nasdaq market maker, subject to certain specified exceptions, to display in the market maker's public quote a customer limit order that (i) is priced better than the market maker's quote, or (ii) represents more than a de minimis increase to the size of the market maker's quote, if the market maker's quote is at the NBBO at the time the customer's limit order is received. The Display Rule provides greater transparency by allowing the market to see improving customer limit orders and, consequently, enhances liquidity and execution opportunities for customer orders.
During January 2000, Shenker placed at least thirty-one (31) buy and sell limit orders to artificially affect the NBBO of several Nasdaq Small Cap securities. Shenker affected the NBBO for these securities by first placing an order with an electronic communications network ("ECN") at a price between the existing best bid and offer prices. Pursuant to the requirements of the Display Rule, this price became the new NBBO. Then, within seconds, Shenker placed one or more orders on the opposite side of the market, which he directed to Nasdaq's computerized Small Order Execution System ("SOES"). Shenker's orders usually were for 500 shares or less.
Shenker's objective was to use the limit orders that he placed with the ECN to move the NBBO quote. Because SOES market makers guarantee execution of certain Nasdaq Small Cap orders up to a maximum amount of shares at the displayed NBBO, Shenker's limit orders placed through SOES were executed at the advantaged NBBO. After moving the bid or offer quote to the desired price, and obtaining an execution, Shenker cancelled, or attempted to cancel, the initial market moving order. In this manner, Shenker manipulated the public quote to obtain better execution prices for his trades.
Shenker's conduct, known in the industry as "spoofing," is illustrated by the following example:
14:44:44 - Shenker placed an order to buy 500 shares of the target security at $34.0625, and directed that it be routed to the ECN. The order raised the NBBO bid price from $31.50 to $34.0625;
14:44:46 - Shenker entered a limit order to sell 500 shares of the target security through SOES at a price of $34.0625, and the order was immediately executed;
14:44:48 - Shenker cancelled his buy order, causing the NBBO bid price to drop from $34.0625 to $31.25.
By manipulating the public quote to obtain a better execution price for his 500 share sell order, Shenker was unjustly enriched in the amount of $1,281.25.
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, prohibit the use of "any manipulative or deceptive device or contrivance in connection with the purchase or sale of any security." Section 17(a) of the Securities Act prohibits such conduct in the offer or sale of any security. These antifraud provisions prohibit trading designed to artificially affect the market price of a security. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 198 (1976). Indeed, the Commission has consistently held that Section 10(b) and Rule 10b-5 prohibit trades made for the purpose of manipulating stock prices because their effect "is to distort the character of the market as a reflection of the combined judgments of buyers and sellers." Halsey, Stuart & Co., SEC Release No. 34-4310 (1949). "In essence, a manipulation is the intentional interference with the free forces of supply and demand." In the Matter of Pagel, Inc., et al., SEC Release No. 34-22280 (1985); Accord United States v. Stein, 456 F.2d 844, 850 (2d Cir. 1972).
Shenker repeatedly engaged in a pattern of conduct that affected the NBBO and permitted the execution of orders at prices that would not otherwise have been available in the market. Shenker's actions interfered with the free forces of supply and demand and undermined the integrity of the NBBO. In the Matter of Ian Fishman and Lawrence Fishman, SEC Release No. 34-40115 (June 24, 1998); In the Matter of Robert J. Monski, SEC Release No. 34-44250 (May 3, 2001). Accordingly, Shenker violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Based on the foregoing, the Commission finds that Shenker violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Accordingly, IT IS HEREBY ORDERED that Shenker:
A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of, Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;
B. Shall pay disgorgement and prejudgment interest of $7,205.96, payable within ten (10) days of the entry of this Order by U.S. Postal money order, certified check, bank cashier's check, or bank money order, made payable to the Securities and Exchange Commission and shall transmit the payment by certified mail (return receipt requested) to the Office of the Comptroller, U.S. Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312, under cover of a letter that identifies the respondent and the name and file number of this proceeding (HO-9086). A copy of the cover letter and of the form of payment shall be simultaneously transmitted to Scott W. Friestad, Assistant Director, Division of Enforcement, U.S. Securities and Exchange Commission, 450 Fifth St., N.W., Washington, D.C. 20549-0708.
By the Commission.
Jonathan G. Katz
|1||This matter is related to SEC v. Israel M. Shenker, Case Number 1:01CV02296 (D.D.C.)( Nov. 5, 2001) (ordering a $10,000 penalty by consent).|
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