$2 Million In “Free Riding” Scam Dupes Brokerage Firms
The U.S. Securities and Exchange Commission (SEC) has announced that Scott Kupersmith, 46, and Fredrick Chelly, 42, pawned themselves off as money managers to some 20 or so brokerage firms, pocketing $600,000 for themselves and causing the firms to lose $2 million in a “free riding” scam that last a couple of years in 2009 and 2010.. “Free riding” is the buying and selling of shares of stock before actually having to pay for them or having funds in place to cover the trades and is obviously illegal.
The pair would buy and sell the same amount of stock in different accounts, often on the same day, expecting to profit on upward and downward movement in the share price. The pair had insufficient funds on hand to cover the trades so they instead used proceeds from the sale of shares in one account to pay for trades of the same stock in another account. If they didn’t cover the trades, the firms ate the trades and suffered the losses, according to the SEC. Often, they used offshore accounts in the trading scam. The broker-dealers caught in the scheme included New York and Purchase, NY; Short Hills and Morristown, NJ; Greenwich, Connecticut; Memphis, Tennessee; Boise, Idaho; Chicago, Illinois; Fort Lauderdale, Florida and San Francisco, Los Angeles, Newport Beach and Roseville, California.
The men traded through DVP accounts, or accounts that firms offer customers if they have adequate funds or securities in accounts at a third party custodial bank to cover the trades made at the firm offering the DVP account. DVP means “delivery-versus-payment/receipt-versus-payment” accounts.
The SEC Director in New York, George Canellos, said “Kupersmith and Chelly engaged in a classic heads, I win; tails, you lose scheme to trade risk free at the expense of broker-dealers.”
The SEC is seeking an order from the court enjoining them from further illegal activity, restitution for the firms and monetary fines in the form of sanctions.