U.S. Securities and Exchange Commission
Litigation Release No. 18266 / July 31, 2003
Securities and Exchange Commission v. Dwarka P. Rathi and Charles H. Pennington, Civil Action No. 03CV01617 (JR) (filed July 31, 2003)
SEC Files Settled Actions Against Two Individuals for After-Hours Wash Sales Trading Scheme
The Securities and Exchange Commission today filed a settled federal court action against Dr. Dwarka Rathi and Dr. Charles Pennington in the United States District Court for the District of Columbia. The Commission also today instituted settled administrative proceedings against Rathi and Pennington, finding that each of them violated the federal securities laws by engaging in a fraudulent, tax-motivated wash sales trading scheme.
The Commission's Complaint alleges, and its administrative Order finds, that both Rathi and Pennington separately employed a trading scheme designed to create artificial tax losses. As detailed in the Commission's Order, Rathi and Pennington placed near-simultaneous matching limit orders to buy and sell the same security in their respective taxable and tax-sheltered accounts. Often, these matching limit orders were placed at prices that were far away from the existing market price in order to create tax losses while still retaining ownership of the stock being traded. Rathi and Pennington were able to match up their respective limit orders at artificial prices by trading illiquid stocks in the less liquid after-hours market using the Island ECN and thereby taking advantage of the fragmented nature of the after-hours market.
The Order finds that Rathi's and Pennington's wash sales created an appearance of market activity, were effected at contrived prices, and did not reflect the supply and demand for the stocks they were trading. In the aggregate, Rathi and Pennington executed 155 wash sales between their respective taxable and tax-deferred accounts. All but three of these wash sales were executed in the after-hours market. This trading scheme was employed by Rathi and Pennington during the fourth quarter of 1999 and involved the securities of over 30 different issuers. As a result of this scheme, Rathi and Pennington created artificial tax losses in their taxable accounts of $221,698 and $77,662, respectively.
In the federal court action, Rathi and Pennington have each consented, without admitting or denying the allegations of the Commission's Complaint, to the entry of a final judgment that requires each of them to pay a $10,000 penalty. In the Commission's administrative proceedings, each of them have consented, without admitting or denying the Commission's findings, to the entry of an order requiring them to cease and desist from violating the antifraud provisions contained within Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In re Dwarka P. Rathi and Charles H. Pennington, Administrative Proceeding No. 3-11200 (filed July 31, 2003).
Also today, the Commission issued an order instituting unsettled cease-and-desist proceedings against a third individual, Rajan Moondra, alleging that he also engaged in a similar fraudulent wash sales trading scheme. See In the Matter of Rajan Moondra, Administrative Proceeding File No. 3-11199; Securities Exchange Release No. 48260 (July 31, 2003).
The Commission wishes to thank the NASD and the Department of Justice, Tax Division for their cooperation and assistance in this matter.
Contact: Paul R. Berger, Associate Director, (202) 942-4854