Jason T. Frazee

Securities Act of 1933
Release No. 8209 / March 18, 2003

Securities Exchange Act of 1934
Release No. 47522 / March 18, 2003

Administrative Proceeding
File No. 3-11070

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative 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") to determine whether Jason T. Frazee ("Frazee") violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and to determine the appropriateness of disgorgement.¹

II.

In anticipation of the institution of these administrative proceedings, Frazee has submitted an Offer of Settlement ("Offer") that the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, and prior to a hearing pursuant to the Commission's Rules of Practice and without admitting or denying the findings set forth herein, except as to jurisdiction over him and over the subject matter of this proceeding, which Frazee admits, Frazee consents to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, Imposing Remedial Sanctions and Cease-and-Desist Order ("Order"). The Commission has determined that it is appropriate to accept Frazee's Offer and accordingly is issuing this Order.

III.

FACTS

Based on this Order and Respondent's Offer of Settlment, the Commission finds that:

A. Respondent

Jason Frazee, age 23, is a self-employed investor living in Forked River, New Jersey.

B. Frazee's Manipulation of the National Best Bid or Offer (NBBO)

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 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.

From approximately March 6 - 8, 2000, Frazee placed approximately sixteen (16) buy limit orders to artificially affect the NBBO of a Nasdaq Small Cap security. Frazee affected the NBBO of this security by first placing a "buy" limit order with an electronic communications network ("ECN"). This order became the new best bid price. Within seconds, Frazee placed much larger orders through a different brokerage account on the opposite side of the market. These orders were filled by brokers 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 moving the bid quote to the desired price and obtaining anywhere from three to thirteen advantaged executions, Frazee cancelled, or attempted to cancel, his initial market moving order. In this manner, Frazee manipulated the public quote to obtain better execution prices for his trades. Overall, Frazee obtained approximately ninety-six (96) advantaged executions at the new bid prices and improved his aggregate purchase price by approximately $18,112.

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

• At 14:38:18, Frazee placed an order to buy 100 shares of the target security at $14.4375, and directed that it be routed to an ECN. The buy order raised the NBBO bid price from $14.125 to $14.4375;

• From 14:38:25 to 14:39:53, Frazee submitted 12 separate "sell" limit orders of the target security at a price of $14.4375 for a total of 6,000 shares. These orders were immediately executed;

• At 14:39:56 Frazee cancelled his buy order.

By manipulating the public quote to obtain better execution prices for these 6000 shares, Frazee was unjustly enriched in the amount of $1,875.

IV.

LEGAL ANALYSIS

Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, prohibit the use of "any manipulative or deceptive device or contrivance in connection with the purchase or sale of any security." Section 17(a) of the Securities Act prohibits such conduct in the offer or sale of any security. These antifraud provisions prohibit trading designed to artificially affect the market price of a security. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 198 (1976). Indeed, the Commission has consistently held that Section 10(b) and Rule 10b-5 prohibit trades made for the purpose of manipulating stock prices because their effect "is to distort the character of the market as a reflection of the combined judgments of buyers and sellers." Halsey, Stuart & Co., SEC Release No. 34-4310 (1949). "In essence, a manipulation is the intentional interference with the free forces of supply and demand." In the Matter of Pagel, Inc., et al., SEC Release No. 34-22280 (1985); Accord United States v. Stein, 456 F.2d 844, 850 (2d Cir. 1972).

Frazee repeatedly engaged in a pattern of conduct that affected the NBBO and permitted the execution of orders at prices that would not otherwise have been available in the market. Frazee's actions interfered with the free forces of supply and demand and undermined the integrity of the NBBO. In the Matter of Ian Fishman and Lawrence Fishman, SEC Release No. 34-40115 (June 24, 1998); In the Matter of Robert J. Monski, SEC Release No. 34-44250 (May 3, 2001); In the Matter of Israel M. Shenker, SEC Release No. 34-45017 (November 5, 2001); In the Matter of Joseph R. Blackwell, Bradford D. Blackwell and Timothy R. Blackwell, SEC Release No. 34-45018 (November 5, 2001). Accordingly, Frazee violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

V.

FINDINGS

Based on the foregoing, the Commission finds that Frazee violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

VI.

ORDER

Accordingly, IT IS HEREBY ORDERED that Frazee:

A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of, Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;

B. Shall pay disgorgement and prejudgment interest of $21,011 payable within ten (10) days of the entry of this Order by U.S. Postal money order, certified check, bank cashier's check, or bank money order, made payable to the Securities and Exchange Commission and shall transmit the payment by certified mail (return receipt requested) to the Office of the Comptroller, U.S. Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312, under cover of a letter that identifies the respondent and the name and file number of this proceeding (HO-9394). A copy of the cover letter and of the form of payment shall be simultaneously transmitted to Scott W. Friestad, Assistant Director, Division of Enforcement, U.S. Securities and Exchange Commission, 450 Fifth St., N.W., Washington, D.C. 20549-0708.

By the Commission.

Jonathan G. Katz
Secretary

Footnote

¹ This matter is related to SEC v. Jason Frazee, Civ. No. 030695 (D.D.C.)(March 18, 2003) (ordering a $10,000 penalty by consent).