U.S. Securities & Exchange Commission
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U.S. Securities and Exchange Commission

Before the

Securities Act of 1933
Rel. No. 8416 / April 29, 2004

Securities Exchange Act of 1934
Rel. No. 49629 / April 29, 2004

Administrative Proceeding
File No. 3-11468


The Commission announced that it has instituted cease-and-desist proceedings against Cary R. Kahn seeking a cease-and-desist order and disgorgement of ill-gotten gains. Kahn is a self-employed investor living in Boulder, Colorado.

The Division of Enforcement ("Division") alleges that Kahn engaged in a fraudulent scheme to take advantage of the Commission's Limit Order Display Rule and manipulate the National Best Bid and Offer ("NBBO") for several securities on 52 different occasions. Kahn carried out the scheme, known in the industry as "spoofing," by entering small market moving orders, either to buy or to sell short, at prices in between the best bid and offer for a Nasdaq stock. This order became the new best bid or offer. Kahn then entered a larger order on the other side of the market (i.e., if the market moving order was a sell, Kahn entered a larger buy order). The second orders were filled by Nasdaq 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. Kahn was thus able to buy or sell the stock at manipulated prices better than he could have received from the prevailing NBBO. Kahn then attempted to cancel the market moving orders before they could be executed, to complete the manipulative scheme. In 49 of the 52 spoofing incidents, Kahn successfully canceled the market moving order.

The proceedings were instituted under Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"). As a result of the acts described above, the Division alleges that Kahn violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.

A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order Instituting Proceedings are true, to provide Kahn an opportunity to dispute these allegations, and to determine whether Kahn should be ordered to cease and desist from future violations and pay disgorgement.

Pursuant to the Commission's Rules of Practice, an initial decision shall be issued by the administrative law judge within 300 days from service of the Order Instituting Proceedings upon Kahn.

SEC Order in this matter



Modified: 05/03/2004