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IN THE UNITED STATES DISTRICT COURT
The Plaintiff Securities and Exchange Commission ("Commission") alleges: SUMMARY 1. This case is about a fraudulent scheme in which defendant Kin H. Lee, ("Lee") a self-employed day trader, made over $86,000 by manipulating the securities of publicly traded companies in the thinly-traded after-hours securities markets. 2. Between January 2000 and April 2001, defendant Lee manipulated the securities of six companies -- whose securities ordinarily traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") -- by using multiple nominee accounts to engage in wash sales and other manipulative conduct. 3. Lee executed wash sales -- the practice of simultaneously buying and selling an issuer's stock at the same price -- to create the impression of an active market in the six securities he manipulated. Lee typically engaged in a series of large volume wash sales at gradually increasing prices to create the appearance that the stock price was rising as a result of genuine market demand for the securities. 4. To further enhance the appearance of an active market created by his wash sales, Lee also placed numerous unmatched buy and sell limit orders at prices substantially higher and lower than the prices at which his wash sales were executed. These "phantom" orders had little or no chance of ever being executed but were visible to the public as evidence of an active market. 5. After Lee succeeded in artificially inflating the price and volume of the securities he had targeted, he then realized profits by selling out his own position which he had previously acquired at a lower price. 6. Lee engaged in his manipulative trading anonymously from his home computer using online brokerage accounts that enabled him to route his orders to an electronic communications network ("ECN"), an electronic system that collects buy and sell orders for securities and allows the orders to be executed against each other and generally displays unmatched orders. 7. By knowingly or recklessly manipulating the securities of six issuers, defendant Lee, directly or indirectly, singly or in concert with others, violated, and, unless restrained and enjoined, will again violate, the antifraud provisions of the securities laws, specifically, Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)] and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)], and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]. JURISDICTION AND VENUE 8. The Commission brings this action pursuant to the authority conferred upon it by Section 20(b) and (d) of the Securities Act [15 U.S.C. §§ 77t(b) and (d)], and Sections 21(d) and (e) of the Exchange Act [15 U.S.C. §§ 78u(d) and (e)], to enjoin permanently the defendant from future violations of the federal securities laws and granting other relief. 9. This Court has jurisdiction, and venue is proper, pursuant to Sections 20(d) and 22(a) of the Securities Act [15 U.S.C. §§ 77t(d) and 77v(a)], and Sections 21 and 27 of the Exchange Act [15 U.S.C. §§78u and 78aa]. 10. Lee, directly or indirectly, used the means and instrumentalities of interstate commerce, or of the mails, or the facilities of a national securities exchange in connection with the acts, practices and courses of business alleged herein, many of which occurred in the Eastern District of Virginia. DEFENDANT 11. Kin H. Lee was, during the relevant time period, a self-employed day trader living in McLean, Virginia. OTHER RELEVANT ENTITIES 12. The Island ECN, Inc. ("the Island"), a Delaware corporation with principal offices in New York, operates the Island electronic communications network -- an open, transparent and fully accessible marketplace that automatically matches buy and sell limit orders for equity securities. Island provides these trading capabilities with complete anonymity for its subscribers. Island matches orders 7:00 am to 8:00 pm EST. FACTS Lee's Accounts And Order Routing 13. During the relevant time period, Lee opened securities brokerage accounts in the name of multiple aliases, at numerous online broker-dealers. He controlled the trading in each of these accounts. 14. Lee used the above-mentioned accounts to enter his buy and sell orders from his home computer. 15. Lee routed the manipulative orders through the Island, which automatically executed his identical buy and sell orders, and publicly displayed his unmatched orders. Lee Traded in the After-hours Market to Facilitate His Manipulation 16. Lee perpetrated his scheme primarily during the after-hours trading session, between 4 p.m. and 8 p.m. 17. The after-hours trading session is generally marked by wide price spreads (the distance between the best bid and offer available), limited depth in an issuer's securities (the number of orders and quotes being placed in the market), and limited market maker quote activity. 18. Consequently, the after-hours marketplace for NASDAQ securities is generally more volatile and less liquid than the regular trading day. By trading in the after-hours market, Lee could and did use large wash sales to easily move the price of the securities and create the appearance of large increases in volume in an issuer's stock. Wash Sale Activity 19. Between January, 2000 and April, 2001, Lee systematically manipulated the shares of various publicly traded issuers by engaging in numerous large wash sale transactions, placing corresponding buy and sell orders for identical or substantially identical amounts of a particular security at the same price at or about the same time. 20. In each of these wash sale transactions, Lee owned the shares that he bought and sold and there was no change of beneficial ownership as a result of the transactions. The scheme was designed to create the appearance of an active and rising market and enable Lee to profit by selling shares he had previously acquired at regular, lower, market prices. 21. By engaging in these fraudulent wash sales, Lee compromised the integrity of the market by creating the appearance of genuine trading activity for the securities in which he transacted. In fact, Lee's wash sale activity usually accounted for the majority of shares traded, in the issuer he targeted, during any given after-hours trading session. 22. In the six instances set forth below, Lee engaged in market manipulation through the use of wash sales. By manipulating the shares of the issuers as detailed below, Lee realized profits of approximately $86,490.62. Wash Sales in CSLR 23. Prior to February 25, 2000, Lee purchased 12,226 shares of Consulier Engineering, Inc. ("CSLR") common stock on the open market at an average purchase price of $2.43 per share. 24. From February 25, 2000, to March 7, 2000, Lee executed over 38 wash sales artificially creating the appearance of an active and rising market for shares of CSLR. 25. The last reported trade of CSLR during regular trading hours on February 25, 2000, had been executed at $2.25 per share. Starting at 4:10:32 p.m., EST, Lee executed seven wash sales ranging in size from 16,000 to 19,000 shares at escalating prices between $2.625 and $2.8125 per share. 26. Lee's wash sales accounted for over 97% of the 126,600 shares of CSLR traded in that after-hour trading session. 27. Over the next seven trading days, Lee continued to dominate the after-hours market of CSLR, trading over 600,000 additional shares and engaging in over 30 more wash sales at prices that ranged from $2.53 per share to $3.81 per share. Lee's trading created the false and artificial appearance that the price and volume of CSLR shares were on the rise. 28. As a result of this manipulative conduct, Lee profited by selling shares of CSLR into the artificially created market and realized a profit of approximately $24,668.24. Wash Sales in BSTC 29. On February 1, 2000, Lee purchased 17,720 shares of Biospecifics Technologies Corp. ("BSTC") during the regular trading hours at an average price of $3.87 per share. 30. During the after-hours trading session of February 1, 2000, Lee executed over 30 wash sales artificially creating the appearance of an active and rising market for BSTC. 31. The last reported trade during regular trading hours on February 1, 2000, had been executed at $4.50 per share. Starting at 4:06:50 p.m., EST, Lee executed over 30 wash sales ranging in size from 6,000 to 17,000 shares at escalating prices between $4.75 and $5.3125 per share. 32. Lee's transactions accounted for over 88% of the 425,690 shares of BSTC traded in that after-hour trading session. 33. As a result of his manipulative conduct, Lee was able to profit by selling shares of BSTC into the artificially created market and realized a profit of approximately $33,771.71 Wash Sales in HAWK 34. Prior to February 3, 2000, Lee purchased 21,000 shares of Hawk Industries, Inc. ("HAWK") common stock on the open market at an average purchase price of approximately $1.30 per share. 35. On February 3, 2000, beginning at 4:05:48 p.m., EST, Lee executed nine wash sales ranging in size from 5,000 to 20,000 shares at escalating prices between $1.50 and $2.09375 per share. 36. Lee's wash sales accounted for over 30% of the 298,781 shares of HAWK traded during the February 3, 2000 after-hours trading session. 37. As a result of Lee's manipulative conduct, he was able to profit by selling shares of HAWK into the artificially created market and realized a profit of approximately $18,694.08. Wash Sales in EFTD 38. Prior to February 10, 2000, Lee purchased 21,600 shares of FTD.com, Inc. ("EFTD") common stock on the open market at an average purchase price of approximately $5.00 per share. 39. On February 10, 2000, the first two trades of EFTD executed in the after-hours trading session consisted of 3000 shares and were both executed at $4.90625 per share. Starting at 4:24:22 p.m., EST, Lee executed eleven wash sales ranging in size from 9,000 to 20,000 shares at escalating prices between $5.125 and $5.71825 per share. 40. Lee's wash sales accounted for over 50% of the 325,600 shares of EFTD traded during the February 10, 2000 after-hour trading session. 41. Lee profited by selling previously acquired shares of EFTD into the artificially created market and realized a profit of approximately $6,019.35. Wash Sales in PPRT 42. During regular trading hours on February 18, 2000, Lee purchased 22,700 shares of Pharmaprint, Inc., ("PPRT") common stock on the open market at an average purchase price of approximately $1.99 per share. 43. On February 18, 2000, beginning at 4:07:38 p.m., EST, Lee executed five wash sales aggregating 78,226 shares, at escalating prices between $1.875 and $2.1325 per share. 44. Lee's wash sales accounted for over 20% of the 282,246 shares of PPRT traded during the February 18, 2000, after-hours trading session. 45. Lee profited by selling shares of PPRT into the artificially created market and realized a profit of approximately $2,341.84. Wash Sales in EPRS 45. Prior to the after hours trading session of April 10 2001, Lee purchased 15,100 shares of Eprise, Inc. ("EPRS") common stock on the open market at an average purchase price of approximately $0.73 per share 46. On April 10, 2001, beginning at 4:03:48 p.m., EST, Lee executed three wash sales in EPRS, aggregating 44,200 shares, at escalating prices between $0.93 and $0.96 per share. Lee's wash sales accounted for over 90% of the 48,300 shares of EPRS traded during the April 10, 2001 after-hours trading session. The next morning, April 11, 2001, at 9:07:12, a.m., Lee executed another wash sale at $0.93 for 15,100 shares. 47. Between 3:04:35 p.m., EST and 3:05:43 p.m., EST, Lee placed 16 successive 100-share orders to buy EPRS between $0.498 and $0.56. The orders remained visible throughout the after-hours trading session. In addition, shortly after Lee's last wash sale on April 10, 2001, at 7:45:16 p.m., EST, Lee placed 26 successive 100-share orders including buys at $0.11 per share and sells at $1.90 per share. These orders further compromised the integrity of the market by creating the impression of genuine investor interest. 48. Lee profited by selling shares of EPRS into the artificially created market and realized a profit of approximately $995.40. Other Manipulative Conduct 49. In addition to his wash sales, Lee also placed numerous unmatched buy and sell limit orders in the securities that he manipulated. 50. Lee placed these orders at prices that were substantially higher and lower than the prices at which his wash sales were executed. Although these orders were visible to investors, Lee knew, or was reckless in not knowing, that these "phantom" orders had little or no chance of being executed. 51. Lee placed these orders through Island to create the appearance that there were many buyers and sellers in the market for these otherwise thinly-traded securities. By creating the appearance of a more liquid market, Lee sought to induce investors to purchase the securities he was manipulating. FIRST CLAIM FOR RELIEF (Market Manipulation)
52. The Commission realleges and incorporates by reference the allegations contained in Paragraphs 1 through 51 above. 53. Defendant Lee, among other things, knowingly or recklessly manipulated the securities of least six publicly traded securities in the after-hours market. By use of the fraudulent scheme outlined above, including the use of wash sales and phantom bids, Lee artificially inflated the price and volume of the six issuers specified above. 54. By reason of the foregoing conduct, defendant Lee directly or indirectly, singly or in concert with others, by use of the means or instruments of transportation or communication in interstate commerce, or by the use of the mails, in connection with the purchase or sale of securities:
55. Consequently, defendant Lee has, directly or indirectly, singly or in concert with others, violated Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. SECOND CLAIM FOR RELIEF (Market Manipulation)
56. The Commission realleges and incorporates by reference the allegations contained in Paragraphs 1 through 55 above. 57. By reason of the foregoing conduct, Defendant Lee, directly or indirectly, singly or in concert with others, by use of the means or instruments of transportation or communication in interstate commerce, or by the use of the mails, in the offer or sale of any securities:
58. Consequently, defendant Lee has, , directly or indirectly, singly or in concert with others, violated Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a). PRAYER FOR RELIEF WHEREFORE, Plaintiff Securities and Exchange Commission, respectfully requests that this Court enter a judgment against defendant Kin H. Lee: (1) permanently restraining and enjoining him, and his agents, servants, employees, attorneys, and all persons in active concert or participation with him who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Section 17(a) of the Securities Act, 15 U.S.C. §77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5], thereunder; (2) requiring defendant Lee to disgorge all monies obtained through the illegal activities described above, plus prejudgment interest thereon, and to pay civil penalties pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d); (3) placing limitations on his trading activity as the court deems just and equitable; and (4) granting such other relief as this Court deems just and proper. Respectfully Submitted, ______________________________
Dated: June 24, 2002 http://www.sec.gov/litigation/complaints/complr17579.htm
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