UNITED STATES OF AMERICA
| ORDER MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER|
Respondent Rajan Moondra ("Moondra" or "Respondent"), pursuant to Rule 240(a) of the Rules of Practice of the Securities and Exchange Commission ("Commission") [17 C.F.R. § 201.240(a)], submitted an Offer of Settlement of Rajan Moondra ("Offer") in the above-captioned cease-and-desist proceedings instituted against him on July 31, 2003, pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"). The Commission deems it appropriate to accept the Offer.
Solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings contained herein, except that the Respondent admits the jurisdiction of the Commission over him and over the subject matter of these proceedings, the Respondent consents to the issuance of this Order Making Findings and Imposing a Cease-and-Desist Order ("Order").
The Commission makes the following findings:
1. Respondent Rajan Moondra, age 43, is a resident of North Brunswick, NJ. At the time of the conduct described herein, Moondra was the account manager at Pinnacle Asset Management, a sole proprietorship operated out of his home. Prior to July 1997, Moondra was registered with the Commission as an investment adviser, doing business as Pinnacle Asset Management.
2. Respondent Moondra employed a fraudulent trading scheme designed to create artificial tax losses by executing wash sales between taxable and tax-sheltered accounts. Between November 24 and December 10, 1999, Moondra executed 56 wash sales in the securities of 12 different issuers between taxable and tax-sheltered accounts in which he had trading authority. These trades resulted in no change in beneficial ownership but created artificial losses of approximately $161,695 in the taxable accounts and artificial gains of approximately $161,695 in the tax-sheltered accounts.
3. As described below, Respondent Moondra executed his wash sales by placing near-simultaneous limit orders to buy and sell the same securities in two of four different accounts at Datek Online Brokerage Services LLC ("Datek"). Those limit orders were processed through the Island ECN, which matched them up and executed the transactions. Moondra typically executed his wash sales in the after-hours market (defined herein as the period between the regular market's 4:00 p.m. close and the 9:30 a.m. opening the next day), and at prices away from the prevailing market price.
4. In November and December 1999, Moondra had trading authority in four accounts at Datek through which he executed the wash sales discussed herein. Two of those accounts were regular taxable accounts and two were tax-sheltered Roth IRA accounts that were opened pursuant to Section 408A of the Internal Revenue Code ("IRC"). Those four Datek accounts are as follows:
a. Joint taxable account number 618-8014, in the name of Dwarka Rathi and his wife ("Rathi Taxable Account"). Dwarka Rathi and Moondra were friends. In March 1997, Moondra transferred at least some of his securities into the Rathi Taxable Account. The account was not put in Moondra's name, but Moondra had trading authority in the Rathi Taxable Account and made personal trades in it. Moondra and Rathi agreed that Rathi would include Moondra's trades in this account on Rathi's tax returns. Moondra kept track of his interests and liabilities in the account, and expected to receive any tax benefit resulting from his trading;
b. Joint taxable account number 626-6005. This joint taxable account was in the name of Rajan Moondra and his wife, Seema Moondra ("Moondra Joint Taxable Account");
c. Tax-sheltered Roth IRA account number 693-0036 in the name of Rajan Moondra ("Moondra IRA"); and
d. Tax-sheltered Roth IRA account number 693-0038 in the name of Seema Moondra.
5. Beginning on at least November 24, 1999, Moondra deliberately began to execute wash sale transactions between one of the regular taxable accounts and one of the tax-sheltered accounts described in paragraph 4, above.
6. Moondra took at least two steps to maximize the success of his wash sale scheme. First, Moondra effected his wash sale transactions by placing near-simultaneous limit orders to buy in one account, and sell in another account. The limit orders were identical with respect to the security and the price. In two of the 56 wash sales, the limit orders also matched in terms of the number of shares. In connection with the remaining 54 wash sales, the size of the limit orders did not match exactly, but the limit orders were executed together to the extent that they overlapped in amount. In the majority of these instances, shortly after his wash trade was executed, Moondra cancelled the outstanding limit order with respect to the non-overlapping shares. Moondra placed these limit orders electronically, and they typically were routed to the Island ECN, an electronic market that executes securities transactions by matching up limit orders. The Island paired Moondra's limit orders and effected transactions between various accounts in which Moondra had trading authority.
7. As a second step to maximize the likelihood that his limit orders would be executed together, Moondra typically executed his wash sales in the after-hours market. (Only 6 of the 56 wash sales discussed herein were executed during regular trading hours.) Moondra engaged in this strategy because he knew that there was less volume in the after-hours market, which he believed increased the likelihood that his limit orders would be paired and executed together.
8. Moondra typically placed his limit orders, and executed his wash sales, at artificial prices that were away from the prevailing market price. (For example, in all but one of Moondra's 56 wash sales, his trades were executed at a price outside the prevailing spread between the existing national best bid and offer prices ("NBBO").) In many cases, Moondra's executed wash sales represented either the highest or lowest price paid for the stock between 4:00 p.m. and 6:30 p.m. on the particular day in question.
9. Moondra's scheme is illustrated by some of his transactions in the securities of Audiocodes Ltd ("AUDC"). On November 22 and 24, Moondra bought 1000 shares of AUDC in two arms-length transactions at competitive market prices. He purchased these shares in the Rathi Taxable Account. Several days later, he effectively moved these shares from the Rathi Taxable Account to the Moondra IRA, through two wash sale transactions that were executed at artificial prices.
a. The first wash sale involving AUDC occurred on December 2, 1999, after the 4:00 p.m. close of regular hours trading. At that time, Moondra placed a limit order to sell 275 shares of AUDC from the Rathi Taxable Account at a price of $64.25, which was approximately $5 below the prevailing market price. Moondra also placed a limit order to buy 276 shares in the Moondra IRA account at a price of $64.25. The Island matched the two orders, and executed the trade at 6:24 p.m. (EST). As a result, Moondra was on both sides of the transaction, having both bought and sold 275 shares at the below-market price of $64.25. Approximately 45 seconds later, Moondra cancelled the outstanding limit order with respect to the remaining one share.
b. The next day, December 3, 1999, Moondra placed two limit orders with respect to the remaining 725 shares of AUDC that were still in the Rathi Taxable Account. After the 4:00 p.m. close, he placed a limit order to sell the 725 shares at $47 per share, which was approximately $23 below the prevailing market price. In his IRA, Moondra also placed a limit order to buy 750 shares of AUDC at $47 per share. The Island matched the two limit orders and executed the trade at 7:15 p.m. (EST). Moondra was again on both sides of this below-market transaction. Approximately 45 seconds later, Moondra cancelled the outstanding limit order with respect to the remaining 25 shares.
10. As a result of the two wash sale transactions described in paragraph 9, Moondra maintained beneficial ownership of 1000 shares of AUDC by moving the stock between two accounts in which he had trading authority. However, because Moondra placed his limit orders at prices away from the market, he also created artificial losses in the Rathi Taxable Account and artificial gains in his IRA. Those realized losses in the Rathi Taxable Account, and the unrealized gains in Moondra's IRA, as measured against the prevailing market prices of AUDC stock, were each approximately $18,800.
11. Between November 24, 1999 and December 10, 1999, Moondra executed approximately 56 wash sales involving the securities of at least 12 different issuers. Over this period of time, as measured against the market price at the time of his wash sales, he created artificial losses in taxable accounts of approximately $161,695 and artificial gains in the tax-sheltered accounts of the same amount.
12. Moondra's wash sales operated as a fraud or deceit concerning the nature of the market for each of the securities that he used in his scheme. Moondra's wash sale transactions, along with the artificial prices at which they were traded, were typically reported to the market. As reported, his wash sales created a false appearance of market activity with respect to both the trading volume and value of the stocks that he used in his scheme.
13. Moondra intentionally executed his wash sale transactions for the principal purpose of creating tax losses in the regular taxable accounts, so that he could claim the losses on his (or Rathi's) tax returns and pay less in taxes than he would otherwise owe.
14. Prior to April 15, 2000, Moondra (jointly with his wife) first filed his 1999 federal tax return. In that return, Moondra initially claimed a tax benefit associated with artificial losses created (and purportedly realized) as a result of at least two wash sale transactions in the Moondra Joint Taxable Account. The bulk of the losses created by his wash sales were not reflected in this return because they occurred as a result of wash sales executed by Moondra in the Rathi Joint Account and, according to his pre-existing arrangement with Rathi, those losses were to be reflected on Rathi's own tax return. After being contacted by the staff of the Division of Enforcement, Rathi did not claim Moondra's wash sale losses on his return.
15. In October 2000, Moondra amended his 1999 federal tax return to include those 1999 transactions that he had executed through the Rathi Joint Account. At the time, he did not claim any additional losses associated with the wash sales that he had executed through that account.
16. In 2002, after Moondra approached the IRS, he was informed by the IRS that, as a result of his wash sale scheme, his and his wife's Roth IRA accounts had been disqualified as Roth accounts. This meant, among other things, that all of Moondra's 1999 transactions in those two accounts lost their tax-protected status. As a result, on or about October 2, 2002, Moondra filed a second amendment to his 1999 return. In this second amended return, Moondra recognized the gains associated with the wash sales in the former Roth accounts, but also claimed a benefit associated with the tax losses created by the wash sales in the regular accounts (including those that he had executed through the Rathi Joint Account).
17. Moondra's wash sales were not only in violation of the federal securities laws, but he was also not permitted to claim any tax benefit arising out of his wash sales. Section 267 of the IRC prohibits a taxpayer from taking a deduction with respect to any loss from the sale of property between related parties. Section 1091 of the IRC also prohibits a taxpayer from taking a deduction with respect to any loss from the sale of a security if the taxpayer repurchases the same security within 30 days of the sale.
18. Moondra's wash sale transactions also had the effect of circumventing the annual $2,000 contribution limit to Roth IRA accounts, which was then set forth in Section 408A of the IRC. For example, by causing his Roth IRA to purchase stock in the regular account at an artificial below-market price, the IRA automatically obtained a gain measured by the difference between its basis and the market price at the time. As measured against that market price, any gain in the IRA mirrored a loss in one of Moondra's taxable accounts. In this sense, Moondra effectively moved - i.e., contributed - money from a taxable account into an IRA. The amounts that Moondra effectively deposited into the IRA accounts in 1999 pursuant to his wash sale scheme far exceeded the 1999 contribution limits.
19. As set forth above, Moondra engaged in wash sale transactions involving no change in beneficial ownership or control. Wash sales are a manipulative or deceptive device or contrivance in connection with the purchase or sale of a security. Moondra engaged in this conduct with scienter. As a result, Moondra violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Based on the foregoing, the Commission finds that the Respondent violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Moondra cease and desist from committing or causing any violation and any future violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
For the Commission, by its Secretary, pursuant to delegated authority.
Jonathan G. Katz
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