The SEC continued its crackdown against "market-manipulating masterminds" today, when it charged two New Jersey-based traders, 37-year-old Joseph Taub, of Clifton, and 21-year-old Elazar Shmalo of Passaic, with manipulating more than 2,000 NYSE and NASDAQ-traded stocks and reaping more than $26 million in profits from their successful trades.
The duo is accused by both the SEC and the NJ Attorney's Office of manipulating more than 23,000 trades, buying and selling $10 billion worth of securities and making more than $26 million in illegal profits, usually through “two or more trading accounts that bought and sold the same lightly traded stock on the same day during the same period of time,” U.S. Attorney Paul Fishman said in a statement.
In the complaint, the DOJ charges the two traders of engaging in “a scheme to place numerous buy and sell orders for specifically targeted, lightly traded securities in a coordinated fashion that allowed them to manipulate the price to their advantage. Over a period of years, they manipulated $10 billion worth of securities in this way, pocketing $26 million in illicit profits at the expense of other investors. The charges we filed today are part of our continuing effort to hold accountable those who would try to illegally tilt the playing field in their own favor.”
“The trading manipulations usually lasted just a few minutes each, during which time the conspirators sometimes controlled at least 80 percent of the volume of a targeted stock and traded in several accounts simultaneously,” Fishman said.
The SEC alleged that Taub and Shmalo “schemed dozens of times per trading day to artificially move stock prices for their personal benefit,” Andrew Calamari, director of the agency’s New York regional office said in a statement.
Taub and Shmalo were charged with one criminal count of conspiracy to commit securities fraud which carries a maximum potential penalty of five years in prison and a fine the greater of $250,000 or twice the gain derived from the offense or twice the loss caused by the offense. The two men are scheduled to appear before U.S. Magistrate Judge Steven C. Mannion in Newark federal court.
Elazar Shmalo's Linkedin page
As Francine McKenna adds, the complaint filed against Taub and Shmalo by the U.S. Attorney says they looked for companies with low trading volumes and then entered numerous trades using “helper” accounts that signaled false information to the market, artificially inflating their prices. Later they sold the shares in “winner” accounts at the artificially inflated prices after accumulating positions at lower prices.
Taub and Shmalo, and additional unnamed conspirators, relied on pre-arranged and coordinated trading among dozens of brokerage accounts they controlled, according to the SEC and DOJ. Taub, according to the SEC and DOJ, was the ring leader, funding many of the accounts that were not in his name and using two companies he controlled , EAC Capital LLC and LNW Direct LLC, to make some of the trades. Some accounts were held in the Taub and Shmalo names while others were in the names of family members. Many of the accounts were “straw” accounts, opened in the names of individuals who neither controlled the accounts nor traded the securities in an attempt to conceal the scheme from regulators and law enforcement.
The trading allegedly was carefully coordinated, using the “helper” account to place multiple small orders in a stock to create upward or downward pressure on the stock price. The “winner” account was primarily used to purchase and sell larger quantities of stocks at prices that had been affected by the manipulative orders in the helper account. The helper and winner accounts were almost always held at different brokerage firms.
Brokerage firms frequently questioned Taub and Shmalo about apparently manipulative trading patterns in the accounts such as wash trades, spoofing, and/or layering and sometimes closed the accounts. Layering is when a trader places non-bona fide orders to buy or sell securities in order to move the price of a security up or down and then quickly cancels them before they are executed. A wash trade allows the trader to create the illusion of volume by simultaneously selling and buying the same stock. Spoofing is when a non-bona fide orders are entered to encourage other traders to place orders that the original trader can exploit after canceling the fake order and entering an order on the opposite side of the market.
When brokerage firms closed the accounts after suspecting illegal manipulation, Taub and Shmalo simply switched to new firms and opened new accounts in other “straw” names. They also put off the inquiries by pretending to be unaware of the violations, in one case apologizing and saying “I’ll make sure it doesn’t happen again.”
While the stocks involved were not identified and were likely microcaps, allowing the "small-time" traders to dominate the volume and price action, the SEC complaint said the shares traded on the Nasdaq and the New York Stock Exchange.
Taub and Shmalo were charged in a Federal Bureau of Investigation complaint with conspiracy to commit securities fraud. They face as many as five years in prison. The two are scheduled to appear Monday in federal court in New Jersey.
The SEC's complaint is presented below (link)