Litigation Release No. 17221 / November 5, 2001
SEC FILES ACTIONS AGAINST SIX INDIVIDUALS FOR "SPOOFING"
SEC v. Leonid Shpilsky, Alexander Shushkovsky and Grigory Kagan, (D.D.C. Nov. 5, 2001).
SEC v. Israel M. Shenker, (D.D.C. Nov. 5, 2001) and In the Matter of Israel M. Shenker, Administrative Proceeding File No. 3-10631, Securities Act of 1933 Release No. 33-8029 and Securities Exchange Act Release No. 34-45017.
SEC v. Joseph Ronald Blackwell, Bradford Dylan Blackwell and Timothy Ryan Blackwell, (D.D.C. Nov. 5, 2001) and In the Matter of Joseph R. Blackwell, Bradford D. Blackwell and Timothy R. Blackwell, Administrative Proceeding File No. 3-10632, Securities Act of 1933 Release No. 33-8030 and Securities Exchange Act Release No. 34-45018.
SEC v. Alexander M. Pomper, (E.D.N.Y. Nov. 5, 2001).
The Commission announced today the filing of four cases against Leonid Shpilsky, Israel Shenker, Joseph, Timothy and Bradford Blackwell ("Blackwells") and Alexander Pomper for engaging in a fraudulent trading practice known as "spoofing." Spoofing is a trading scheme used to obtain improper price improvements on stock trades in the NASDAQ market. "Spoofers" exploit the SEC's Limit Order Display Rule and market makers' willingness to execute customer orders at the National Best Bid or Offer ("NBBO") price.
An example of spoofing from the Commission's Complaint filed today against Alexander Pomper ("Pomper") is as follows: Pomper placed a limit order to buy 300 shares of Gumtech International ("GUMM") at $11.375 per share when the best bid side of the NBBO was $11.0625 per share and the best offer side was $11.4375 per share. Due to the Limit Order Display Rule, Pomper's $11.375 per share buy order became the new best bid price. Pomper then placed an order to sell 2000 shares of GUMM at $11.375 per share through another market making firm. Pomper obtained immediate execution at $11.375 per share (rather than $11.0625 per share) because the other market maker honored the $11.375 best bid price created by Pomper's buy order. After Pomper obtained his price improvement of $.3125 per share, or $625.00, he canceled his order to buy at $11.375. Pomper's conduct was deceptive because he improved the NBBO with a limit order he did not actually want filled.
In separate actions filed today, the Commission alleged that Shpilsky, Shenker and the Blackwells obtained fraudulent price improvements by placing numerous orders in the market that improved the NBBO, immediately having orders executed on the opposite side of the market at the improved price, and then canceling the initial order. Without admitting or denying the Commission's allegations, Shpilsky consented to be permanently enjoined from violating the antifraud provisions of the federal securities laws (i.e., Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder), and pay $12,000 in disgorgement. The Shpilsky action also names two relief defendants (Alexander Shushkovsky and Grigory Kagan) who will pay a total of $13,430 in disgorgement plus interest. In separate administrative proceedings, without admitting or denying the Commission's findings, Shenker and the Blackwells consented to cease and desist from violating the antifraud provisions of the federal securities laws and pay disgorgement plus interest of $7,206 and $3,213, respectively. In separate civil actions, without admitting or denying the Commission's allegations, both Shenker and the Blackwells consented to pay a $10,000 civil penalty.
The Commission also filed a complaint in federal court charging Pomper with using a similar spoofing strategy to obtain fraudulent price improvements in Nasdaq stocks. The complaint alleges that Pomper violated the antifraud provisions of the federal securities laws and seeks a permanent injunction against future violations of the antifraud provisions of the federal securities laws, disgorgement, prejudgment interest and civil penalties.
The SEC acknowledges the assistance provided by the National Association of Securities Dealers in connection with these matters.