UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 50046 / July 20, 2004

ADMINISTRATIVE PROCEEDING
FILE NO. 3-11468

The Securities and Exchange Commission (Commission) commenced this proceeding on April 29, 2004, with an Order Instituting Proceedings (OIP) against Respondent Cary R. Kahn (Kahn). On April 30, 2004, Kahn was served with the OIP. On June 8, 2004, I issued an order granting Kahn until June 21, 2004, to file an answer. On June 29, 2004, the Division of Enforcement (Division) filed a Renewed Motion for Leave to File Motion for Summary Disposition or Motion for Default Judgment (Motion). In its Motion, the Division seeks an order requiring Kahn to cease and desist from violating Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and ordering him to disgorge $12,186.21, plus $1,217.54 in prejudgment interest.

On June 30, 2004, I issued an order requiring Kahn to show cause by July 16, 2004, why he should not be held in default. Kahn has failed to show cause why he should not be held in default. Because Kahn failed to file a timely answer, he is in default. See 17 C.F.R. §§ 201.155(a), .220(f). Pursuant to Rule 155(a) of the Commission's Rules of Practice, 17 C.F.R. § 201.155(a), I find the following allegations in the OIP to be true:

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 National Best Bid and Offer (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.

Kahn, age 51, is a self-employed investor living in Boulder, Colorado. Between approximately March and June 2002, Kahn placed at least fifty-two buy and sell limit orders to alter the NBBO of several securities. Kahn affected the NBBO for these securities by first placing an order with an electronic communications network (ECN). This order became the new best bid or offer. Within seconds, Kahn placed one or more larger orders through a different brokerage account on the opposite side of the market. These orders were filled by market makers who guaranteed execution of the security at the new NBBO up to a maximum number of shares, regardless of the size of the NBBO quote.

After causing the bid or offer quote to move and obtaining an execution, Kahn would cancel, or attempt to cancel, his initial market moving order. In this manner, Kahn manipulated the public quote to obtain better execution prices for his trades. During the relevant time period, Kahn obtained approximately fifty-two advantaged executions and cancelled forty-nine of his fifty-two market moving orders, improving his aggregate purchase or sale price by approximately $12,188.

Kahn's conduct, known in the industry as "spoofing," is illustrated by the following example:

12:27:11 - Kahn placed an order to sell short 100 shares of the target security at $15.80, and directed that it be routed to the ECN. The order lowered the NBBO offer price from $16.16 to $15.80;

12:27:13 - Kahn entered a limit order to buy 500 shares of the target security at a price of $15.80, and the order was immediately executed;

12:27:28 - Kahn cancelled his sell order.

By improperly altering the public quote to obtain a better execution price for the buy order, Kahn was unjustly enriched in the amount of $180. Kahn then engaged in "spoofing" again to sell his 500 shares of the target security a few minutes later on the same day:

12:29:00 - Kahn placed an order to buy 100 shares of the target security at $16.10, and directed that it be routed to the ECN. The order raised the NBBO bid price from $15.61 to $16.10;

12:29:04 - Kahn entered a limit order to sell 500 shares of the target security at a price of $16.10, and the order was immediately executed;

12:29:07 - Kahn cancelled his buy order.

By improperly altering the public quote to obtain a better execution price for the sell order, Kahn was unjustly enriched in the amount of $245.

As a result of the conduct described above, Kahn violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5.

On the basis of the foregoing, it is appropriate and in the public interest to impose the sanctions requested by the Division against Kahn.

IT IS ORDERED, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, that Cary R. Kahn cease and desist from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and

IT IS FURTHER ORDERED, pursuant to Section 8A(e) of the Securities Act of 1933 and Section 21C(e) of the Securities Exchange Act of 1934, that Cary R. Kahn shall disgorge $12,186.21, plus $1,217.54 in prejudgment interest.

Payment of the disgorgement and prejudgment interest shall be made by United States postal money order, wire transfer, certified check, bank cashier's check, or bank money order made payable to the Securities and Exchange Commission. Payment shall be accompanied by a letter that identifies Cary R. Kahn as the respondent and Administrative Proceeding No. 3-11468, and shall be mailed or delivered to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop-3, Alexandria, Virginia 22312. A copy of the cover letter and instrument of payment shall be sent to Polly A. Atkinson, Division of Enforcement, Central Regional Office, Securities and Exchange Commission, 1801 California St., Suite 1500, Denver, Colorado 80202-2656.

http://www.sec.gov/litigation/admin/34-50046.htm