The U.S. Securities and Exchange Commission announced the filing of a settled market manipulation action on September 21 in the United States District Court for the Northern District of Illinois against three individual day traders, Stanley Awdisho, Michael Kundrat, and Kristopher Smolinski.
The Commission's Complaint alleges that approximately 75 times between September and December of 1999, Awdisho, Kundrat and Smolinski each manipulated the price of stock options by engaging in a scheme commonly referred to as "small lot baiting." Small lot baiting or "spoofing" involves an order placed by a market participant with the intention of briefly triggering a market movement from which the participant or others may benefit by trading the opposite side of the original manipulative order. The Complaint further alleges that to carry out the scheme, Awdisho, Kundrat and Smolinski placed limit orders for a small number of options contracts on one options exchange to artificially raise or lower that exchange's quoted bid or offer. Awdisho, Kundrat and Smolinski then purchased or sold much larger opposite positions on other exchanges that matched the artificially raised or depressed price displayed at the first exchange. After their larger orders were executed, the Awdisho, Kundrat and Smolinski immediately sent an order to cancel the initial bait order. As a result of the scheme, the Complaint alleges that Awdisho, Kundrat and Smolinski unfairly profited at least $25,000 by obtaining execution of their larger orders at more favorable prices than otherwise available in the market.
Simultaneous with the filing of the Commission's Complaint, Awdisho, Kundrat and Smolinski consented, without admitting or denying the allegations of the Complaint, to permanent injunctions against future violations of Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, the antimanipulation and antifraud Sections of the Exchange Act. Awdisho and Kundrat also consented to the payment of a $10,000 civil penalty. Smolinski consented to the payment of a $20,000 civil penalty.