Litigation Release No. 18040 / March 18, 2003
SEC Files Settled Actions Against Two Individuals for "Spoofing"
Securities and Exchange Commission v. Leonard T. Sheehan, Case No. 1:03CV00694 (D.D.C. March 18, 2003) and In the Matter of Leonard T. Sheehan, Administrative Proceeding File No. 3-11069, Securities Act Release No. 33-8208 and Exchange Act Release No. 34-47521
Securities and Exchange Commission v. Jason T. Frazee, Case No. 1:03CV00695 (D.D.C. March 18, 2003) and In the Matter of Jason T. Frazee, Administrative Proceeding File No. 3-11070, Securities Act Release No. 33-8209 and Exchange Act Release No. 34-47522
The Securities and Exchange Commission announced today the filing of settled civil actions against Leonard T. Sheehan and Jason T. Frazee in the United States District Court for the District of Columbia. Sheehan and Frazee each consented, without admitting or denying the Commission's allegations, to pay civil penalties of $10,000. The Commission also announced the issuance of settled cease-and-desist orders against Sheehan and Frazee. The Orders find that Sheehan and Frazee engaged in a fraudulent trading practice known as "spoofing." The scheme is used by traders to exploit the Commission's Limit Order Display Rule and market makers' willingness to execute customer orders at the National Best Bid and Offer ("NBBO") price. Spoofing involves placing small limit orders for thinly traded NASDAQ securities at prices that are between the current NBBO prices. The conduct artificially narrows the quoted spreads on securities, allowing traders to take advantage of the improved prices by executing much larger orders on the opposite side of the market.
An example of spoofing from the Commission's Order against Sheehan is as follows: he placed a limit order to sell 100 shares of Barrett Business Services, Inc. ("BBSI") at $3.375 per share, when the best offer side of the NBBO was $3.937 per share. He directed that the trade be routed to an electronic communications network and, due to the Limit Order Display Rule, his order became the new best offer price. He then placed two orders to buy 1,000 shares of BBSI at $3.375 per share through another market making firm. Sheehan obtained immediate execution at that price because the other market maker honored the best offer price created by Sheehan's sell order. By doing this, Sheehan decreased his aggregate cost of buying BBSI by $1,125, or $.562 per share, because he was able to purchase 2,000 shares of BBSI at $3.375 per share (the offer price after he moved the market) rather than at $3.937 per share (the offer price before he moved the market). After his buy orders were executed, Sheehan canceled his sell order.
The Commission's Orders find that, on twenty-five and sixteen occasions, respectively, Sheehan and Frazee placed orders that improved the NBBO, immediately had orders executed on the opposite side of the market at the improved price, and then canceled (or attempted to cancel) the initial order. As a result, Sheehan and Frazee obtained otherwise unobtainable execution prices in violation of the antifraud provisions of the federal securities laws. Without admitting or denying the Commission's findings, Sheehan and Frazee were ordered to cease and desist from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and to pay disgorgement plus prejudgment interest of $11,558 and $21,011, respectively.
The Commission acknowledges the assistance provided by the National Association of Securities Dealers in connection with these matters.
