UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

April 29, 2004

ADMINISTRATIVE PROCEEDING
File No. 3-11468

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist 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") against Cary R. Kahn ("Kahn" or "Respondent").

II.

After investigation, the Division of Enforcement alleges that:

A. RESPONDENT

Cary R. Kahn, age 51, is a self-employed investor living in Boulder, Colorado.

B. FRAUDULENT SPOOFING CONDUCT

1. 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.

2. Between approximately March and June, 2002, Kahn placed at least fifty-two (52) 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.

3. 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 (52) advantaged executions and cancelled forty-nine (49) of his fifty-two (52) market moving orders, improving his aggregate purchase or sale price by approximately $12,188.

4. 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.

5. 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.

6. 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.

C. VIOLATIONS

As a result of the conduct described above, Kahn violated Section 17(a) of the Securities Act, which prohibits fraudulent conduct in the offer or sale of securities, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with the purchase or sale of securities.

III.

In view of the allegations made by the Division of Enforcement, the Commission deems it necessary and appropriate that cease-and-desist proceedings be instituted to determine:

1. Whether the allegations set forth in Section II are true and, in connection therewith, to afford Respondent an opportunity to establish any defenses to such allegations; and

2. Whether, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act Respondent should be ordered to cease and desist from committing or causing violations of and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and whether Respondent should be ordered to pay disgorgement pursuant to Section 8A(e) of the Securities Act and Section 21C(e) of the Exchange Act.

IV.

IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days from service of this Order at a time and place to be fixed, and before an Administrative Law Judge to be designated by further order as provided by Rule 200 of the Commission's Rules of Practice, 17 C.F.R. § 201.200.

IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 of the Commission's Rules of Practice, 17 C.F.R. § 201.220.

If Respondent fails to file the directed answer, or fails to appear at a hearing after being duly notified, the Respondent may be deemed in default and the proceedings may be determined against him upon consideration of this Order, the allegations of which may be deemed to be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission's Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 221(f) and 201.310.

This Order shall be served forthwith upon Respondent personally or by certified mail. IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an initial decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) of the Commission's Rules of Practice.

In the absence of an appropriate waiver, no officer or employee of the Commission engaged in the performance of investigative or prosecuting functions in this or any factually related proceeding will be permitted to participate or advise in the decision of this matter, except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is not "rule making" within the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the provisions of Section 553 delaying the effective date of any final Commission action.

By the Commission.

http://www.sec.gov/litigation/admin/33-8416-o.htm