U.S. Securities and Exchange Commission
Litigation Release No. 20736 / September 24, 2008
SEC v. Kenneth Suarez, et al., Civil Action No. 08-3900 (EDNY)
SEC Charges Six Defendants In $1.6 Million Dollar Stock Loan Scam
On September 24, 2008, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Eastern District of New York charging four individuals and two corporate entities involved in the securities lending, or “stock loan,” business with securities fraud. The Commission’s complaint alleges that over a period of nearly four years from 2000 through 2004, the six defendants defrauded Schonfeld Securities, LLC (“Schonfeld”), a Long Island, New York, brokerage firm, out of a total of at least $1.66 million through the payment of sham finder fees and undisclosed kickbacks that ultimately came out of Schonfeld’s pocket.
The defendants named in the Commission’s complaint are:
Kenneth Suarez (“Suarez”), age 57, resides in Staten Island, New York. From September 2003 through May 2007, Suarez was employed as a securities lending representative with Schonfeld, where he was head of the stock loan trading desk from January 2004 to May 2007.
Kevin King (“King”), age 54, resides in Freehold, New Jersey. From May 1997 through January 2005, King was employed as a securities lending representative at Van der Moolen Specialists USA, LLC (“VDM”).
Ronald Garcia (“Garcia”), age 61, resides in Hudson, New York. From January 2000 through May 2005, Garcia operated defendant Independent Investor Services, Inc. (“Independent Investor”), a purported stock loan finder firm.
Gilbert Beital (“Beital”), age 68, resides in Tampa, Florida. From January 2000 through May 2005, Beital operated defendant Gilcar Securities of Florida, Inc. (“Gilcar”), a purported stock loan finder firm.
Independent Investor is a New York corporation with a business address in Iselin, New Jersey. Independent Investor is controlled by Garcia, who is its only officer.
Gilcar is a Florida corporation with a business address in Tampa, Florida. Gilcar is controlled by Beital, whose wife is its only officer.
The Commission’s complaint specifically alleges as follows:
Pursuant to the defendants’ fraudulent stock loan scheme, Suarez, while the head of Schonfeld’s stock loan trading desk, caused Schonfeld to enter into stock loan transactions on terms that were deliberately unfavorable to Schonfeld in order to enable the counterparty to pay sham finder fees to either Garcia or Beital. A portion of those fees were then kicked back to Suarez: Garcia paid kickbacks to King -- who arranged the loans with Suarez and caused his firm, VDM, to pay the sham finder fee to Garcia -- and King then paid kickbacks to Suarez, while Beital paid kickbacks directly to Suarez. The defendants sometimes took steps to conceal the kickback payments by, among other things, exchanging cash-filled envelopes at public restaurants, having the finder pay the trader’s credit card and mortgage bills, and making payments to a shell company.
From January 2004 to December 2004, King caused VDM to pay Garcia’s firm, Independent Investor, a total of approximately $200,000 in sham finder fees on over 2,000 stock loan transactions involving Schonfeld. Neither Garcia nor anyone else associated with Independent Investor performed any services in connection with those transactions. The sham finder fees were paid at Schonfeld’s expense because Suarez caused Schonfeld to enter into the stock loans on terms that were less favorable than Schonfeld would have otherwise obtained, thus enabling VDM to pay the fees to Independent Investor. Garcia then paid a portion of the sham finder fees to King, who, in turn, paid a portion of the fees to Suarez.
From March 2000 to December 2004, Beital engaged in similar fraudulent conduct with Suarez and Suarez’s predecessor as head of Schonfeld’s stock loan trading desk (the “Second Schonfeld Trader”). Pursuant to this kickback arrangement, Beital’s firm, Gilcar, received approximately $1.46 million in stock loan finder fees at Schonfeld’s expense. Suarez caused Schonfeld to enter into stock loans on terms that were less favorable than Schonfeld would have otherwise obtained, thus enabling the counterparties to pay finder fees to Gilcar, in exchange for which Beital paid kickbacks to Suarez and the Second Schonfeld Trader. Suarez received approximately $90,000 in kickbacks from Beital.
All six defendants are charged with 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 and, in the alternative, with aiding and abetting each other’s violations of certain of the above provisions of the federal securities laws. The Commission’s complaint seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties.
In parallel criminal proceedings, the United States Attorney’s Office for the Eastern District of New York filed criminal charges in May 2008 against Suarez and Beital for some of the same conduct alleged in the Commission’s complaint.
The Commission acknowledges the assistance and cooperation of the United States Attorney’s Office for the Eastern District of New York and the Federal Bureau of Investigation in this matter. The Commission’s investigation is ongoing.
For additional information see: