Participants at the U.S.

Securities and Exchange Commission (SEC) Technical Assistance Programs accept

this binder and any other material received during the Program with the understanding and
acknowledgment that certain investigatory, regulatory, and law enforcement techniques and other
potentially non‐public information may be provided and discussed as needed in the interest of providing
comprehensive training, and that any non‐public information disclosed or distributed during the course of
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 make no public use of the information without prior written approval of U.S. SEC staff;
 notify the SEC of any legally enforceable demands for the information prior to complying with the
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 not grant any other demand or request for the information, without prior
written notice to and lack of objection by, the staff of the SEC.

Participants also receive these materials with the understanding and acknowledgement that the SEC as a
matter of policy, disclaims responsibility for any private publication or statement by any of its employees, and
that the views expressed by the SEC speakers express the authors’ views and do not necessarily reflect the
views of the Commission, the Commissioners, or other members of the staff of the Commission.
 MARKET MANIPULATION
Tom Swiers
Office of International Affairs
U.S. Securities and Exchange Commission
 3

Disclaimer
The Securities and Exchange Commission, as
a matter of policy, disclaims responsibility for
any private publication or statement by any of
its employees. The views expressed herein are
those of the author and do not necessarily
reflect the views of the Commission or of the
author’s colleagues upon the staff of the
Commission.
 4

What is market manipulation?

• Intentional or willful conduct designed to deceive or
defraud investors by controlling or artificially affecting the
price of securities, or

• Intentional interference with the free forces of supply and

demand

• Can be designed to drive a stock’s price up or down.

 5

Why is it a problem?
• Harmful because it affects the integrity of the market place

• Price should be set by the unimpeded collective judgment

of buyers and sellers

• Undermines fair, honest and orderly markets

• Investors will stay out of your market if they perceive that

it is not fair and is subject to manipulation
 6

Sources -Tips Complaints & Referrals

• A TCR is any credible allegation or statement of concern
about a possible violation of the federal securities laws or
conduct that poses a possible risk of harm to investors.

• Sources
• The Public
• Other Government Agencies
• Self-Regulatory Organizations (SROs)
• Self-Generated Referrals
• Foreign government agencies
 7

SEC’s Office of Market Intelligence

Handles the Majority of TCRs

Conducts “Triage”
• Evaluates Quality of Information
• Determines Jurisdiction and Actionability
• Determines Connections to Open Matters
• Determines Connections to Existing Data

Market Surveillance
• Looks for unusual trading
• Assisted by FINRA – SONAR system.
 8

Two Broad Types

• “Pump and dump” or “Hype and dump”

• Trading manipulations
• Arbitrary Quotes
• Wash Sales
• Matched Orders
• Marking the Close
• Domination and Control of Market
• Layering

• May see both types at work in a particular manipulation

• For example, a combination of false press releases along with
wash trades and matched orders
 9

Where is the Money?

• Probably the most important thing to determine is

who is making the money.

• In all likelihood, if you can determine who profited

at the end of the day that is the prime suspect for
your manipulation
 10

Commencement of a Manipulation
• Market manipulations typically involve thinly traded shares
of little known or start up companies
• With small volume of trading, it is easier to effect the price of the
stock
• Also, easier to make fraudulent or outlandish claims about the
financial condition or business prospects of a little-known company

• But this is not always the case – sometimes a fraudster

will circulate a false rumor about well-known company
hoping to benefit when the stock price runs up (if it’s good
news) or down (if it’s bad news)
 11

Shell Companies (Microcaps)

• Insiders purchase dormant corporation with previously
registered freely tradable stock (“shell company”)
• Merge that dormant corporation into privately-held
company with some genuine or purported line of business
• Find a cooperative transfer agent
• Locate a broker-dealer who is willing to make a market in
the newly merged company
• Trading begins in the shares of the newly-created entity
Gain control of a shell company
• Find a closely-held shell company (usually a defunct
company).
• Orchestrate a reverse merger of a privately-owned
company at a grossly over-inflated price which give the
stock manipulator a majority of the company’s shares.
• Rename the company.
• Buys out any remaining shareholders and appoints new
officers and directors.
• Reverse stock splits
• RESULT – Stock manipulator has gained control of a
public company without having to go through more
stringent IPO process.
 13

Bogus “Exempted” Securities

• Fraudsters need to use some mechanism for issuing
“freely tradable” securities to themselves

• Will often issue stock pursuant to an exemption to the

SEC registration statements

• In reality, these exemptions are being abused and do not

apply

• Examples in the US:

• Rule 504 offerings – allow sales of limited dollar amount that
purportedly comply with state requirements
• S-8 offerings – stock issued to advisers and consultants as
purported compensation
 14

Category 1: Pump and Dumps

• Insiders or promoters obtain ownership or control of a
significant block of stock of selected issuer
• Can use their own accounts or nominees

• Then they start hyping the stock to the public to generate

artificial interest in stock and cause price to rise
• Often use internet, spam email and faxes
 15

The Pump: False Press Releases

• Company or promoter puts out press release announcing
some form of market moving news that is not true or
without a legitimate basis

• Examples:
• Claim of a significant transaction, contract or business deal
• Claim to an invention, patent, new product or license for certain
technology
• False or baseless financial claims, i.e. record earnings, revenues or
sales
• Sometimes the press releases will contain some element of truth
 16

The Pump: Paid Promoters

• Purportedly independent adviser or analyst publishes a
recommendation or analysis regarding company
recommending stock as a “bargain”, “must buy” or “hot buy”
• In reality, this recommendation or analysis has been paid for by
insiders or promoter but this payment is not disclosed
• Also a violation of the anti-touting provisions of Section 17(b) of the
Securities Act

• Don’t typically call themselves “promoters” – might appear as

“consultant”

• Who they might be: former or current registered reps; company

insiders; people we’ve already barred from the industry
 17

Common Promotion Methods

• SPAM -send mass unsolicited e-mails touting stocks

• NEWSLETTER – mass mailed tout sheet

• WEBSITE COVERAGE - websites which provide favorable

research (tout) about stocks

• INVESTOR RELATIONS/PUBLIC RELATIONS (IR/PR) -

internal employee or external consultant responsible for
coordination of promotional campaign and issuance of press
releases

• ONLINE ADS – placed on reputable websites such as the WSJ

• CYBER MANIPULATION – increasing use of cyber-methods

 18

Message Boards, Social Media and Chat

Rooms
• Manipulators have found the internet to be a great tool for
manipulating stocks

• Use e-mail spam campaigns, message board postings and

chat rooms to create a “buzz” or public interest in a particular
stock

• May send out literally thousands of e-mails purporting to come

from multiple independent sources

• May be orchestrated “conversations” in chat rooms, social

media or on message boards that follow particular stocks or the
markets

• In reality it can all be traced back to the manipulators

 19

Boiler Rooms
• In the “good old days” of market manipulation before the
internet but boiler rooms are making a comeback.

• A small army of dishonest salesmen who make cold calls

to as many investors as possible

• Use high pressure sales tactics to convince customers to

buy stocks that have been manipulated

• May make outlandish promises of sure quick profits

coupled with misrepresentations about the issuer
 20

The Dump: TIME TO SELL

• Once the manipulators have been successful in driving up
the price of the companies stock through these various
means, they will “dump” or sell their own shares to the
unsuspecting public and walk away with the profits

• Investors are left holding largely worthless stock

• Can be highly profitable for manipulators

 21

Category 2: Trading Manipulations

• Trading Activity Designed to Fool the Market
• Trading at volumes and times designed to fool the
market about share values
 22

Manipulators’ Targeted Securities

• Illiquid securities
• Value traders tend not to follow illiquid securities closely because they
cannot trade sufficient volume to profit, given cost of fundamental
research

• Poor disclosure and information

• Sophisticated value traders tend not to follow securities that they
cannot readily value
• Manipulators may target securities for which little fundamental
information is available

• Hard-to-borrow securities
• Sophisticated value traders generally cannot sell securities that they
cannot borrow. Short selling cannot be covered.

• Controlled float
• Manipulated securities are often “small” stocks where the manipulator
can control substantial portion of shares outstanding
 23

Manipulative Trading
• Be on the look-out for
• Arbitrary Quotes
• Wash Sales
• Matched Orders
• Marking the Close
• Domination and Control of Market
• Layering
 24

Arbitrary Quotes and Trading

• Open the market with arbitrary quotes that bear no logical
relation to the issuer’s business history, earnings, assets
and products

• “Bizarre Trading” – is there any sense to the trading you

see?
• Do trading patterns follow those expected from free forces of
supply and demand?
 25

Wash Sales and Matched Orders

• Wash Sales – a person places simultaneous orders to
buy and sell quantities of the same security in
transactions involving no change of beneficial ownership
of the stock

• Matched Orders – a person or persons places buy or sell

orders for a security with the knowledge that sell or buy
orders of substantially the same size and price will be
placed simultaneously

• Engaged in for the purpose of creating a false

appearance of active trading in the market for a security
• May be done at successively higher and higher prices to
move market price of security upwards
 26

Marking the Close

• Repeatedly upping the bid at or near the close of the
market, or

• Purchasing the stock at or near the close of the market at

an uptick

• Done to send a positive signal to the market

• Closing market price is viewed by market professionals

and investors as a guide to the trend of the market
 27

Control of the Market

• Market Maker comes to dominate and control market for a
particular security

• Once control is established, market maker is free to

arbitrarily move bid and price of security upwards without
reference to forces of supply and demand

• If the manipulator can lure in the momentum traders and

ill-informed value traders, the manipulation may succeed
 28

Layering
• Trader places orders with no intention of having them
executed but rather to trick others into buying or selling a
stock at an artificial price driven by the orders that the
trader later cancels.
Start of an Investigation
• First thing we did is to pull the company’s filings to see
what the US company was disclosing.

• Question – do you have similar disclosure requirements

for your listed companies?

• Even if appropriate disclosures were made, the staff will

sometimes keep the company on their radar.
Pull the stock price & volume charts
Examine the Issuer
• Conduct a fundamental analysis of the issuer’s financial
statements

• Questions to ask:
• What assets support the company’s stock
• Are they real or fictitious
• How do earnings look – both past and current
• Do the financial statements support the price at which the stock
was trading
• Goodwill
How To Investigate
• Need to come at these investigations from two different
directions at once

• First, who was behind the market trading?

• Where did the shares come from, who was trading, and most
importantly who PROFITED from the trading ?

• Second, who was behind the hype and is there any truth
to the claims made?
Who is Trading?
• Broker-dealer information and stock transfer records will
show you who has the stock and how they ended up with
it

• Key for showing control over company and helping

identify nominee accounts

• Every time stock certificate is transferred to another

name, you have another piece of the puzzle
Exam staff put
together very
useful charts
Excel spreadsheet of all
trades in stock based on
firm’s trade blotter,
sorted by client
Analysts and Advisers
• “Purportedly independent” advice or recommendation –
show it isn’t

• Subpoena records to see if have any ties to the issuer,

insiders or promoter

• Most important, subpoena any and all financial records of

analyst or adviser to see if obtained any kind of
compensation or promise of future compensation from
issuer, insider or promoter

• Will also want to subpoena any such records from issuer,

insider or promoter
Internet Information
• When using the internet, manipulators generally try to
hide their identities

• Operate behind various screen names

• Manipulators may be the source of hundreds of e-mails

and postings, all appearing to come from many different
sources

• Need to try to trace the spam e-mails, message board

postings and chat room conversations back to their true
source
Tracing E-mails
• For E-mails, we can subpoena the internet service
provider that carries the e-mail account for account
information relating to the e-mail account.

• We cannot get content of email under US privacy laws,

but can get account identifying information.

• That’s often enough to allow us to show that message

board postings or spam came from the manipulator

• Question – do you have the ability to get email address,

account information, or content of emails?
IP Addresses Can Be Key
• In one case, we were able
to show that four accounts
had all been opened at the
same time, from the same
IP address, using free
email accounts set up at
the same time

• The four accounts held $4

million in proceeds that we
were able to freeze by
going to court
 39

Obtaining Witness Statements

• Various ways we can get witness statements
• Voluntary telephone interview
• Voluntary in-person interview
• Sworn voluntary testimony
• Testimony under subpoena

• Pros & cons to each approach

• Example: Sworn Testimony under Oath
• ADVANTAGES:
• Once placed under oath, false testimony could trigger perjury charge by criminal
authorities
• Minimizes the chances that a witness will change his/her story
• Easier to use to impeach witnesses if they give subsequent inconsistent testimony

• DISADVANTAGES
• Slower – often takes more time to schedule
• Gives counsel more time to prepare their clients and time to concoct a story or
explanation
Finishing your investigation
• After all of this investigative work you want to bring the
different prongs of your investigation back together

• Tie the false press releases, paid hype, false internet

spam or postings back to the insider or promoter who
profited from the manipulation and walked away with the
trading profits

• Follow the money to make sure you find all the nominee
accounts
 41

HARMAN HOAX TENDER OFFER

• In July 2009, Hazem Al-Braikan, a financial adviser based in Kuwait, drafted and
issued a bogus press release claiming that a non-existent private investment
group in Saudi Arabia planned to acquire Harman International through a tender
offer.
• Al-Braikan fabricated the press release over the weekend of July 18-19, 2009,
which he then faxed or emailed to various news organizations in the U.S. and
abroad.
• On the morning of Monday, July 20, a U.S. Internet news website posted the false
announcement, which claimed that an entity called "Arabian Peninsula Group"
was planning to make a public tender offer for Harman stock at $49.50 a share. At
the time, Harman International's common stock was trading at about $25 per
share. The false announcement led to a pre-market trading surge that drove
Harman International's stock up by nearly 40%. After Harman International
repudiated the announcement an hour later, the company's share price dropped
precipitously, closing the day at $20.86, more than twenty percent lower than the
prior trading day's close.
• Al-Braikan perpetrated a similar hoax using Textron Inc. in April 2009, contacting
media outlets about an alleged "scoop" regarding an upcoming takeover bid for
Textron by a Middle Eastern company. In actuality, no such deal existed.
 42

Harman Press Release

 43

HARMAN HOAX TENDER OFFER

• Discretionary authority over his client accounts.

• Started buying Harman shares in June.

• Shared purported market rumors surrounding Harman

International.

• Harman stock did eventually nearly double in price by

November 2009.
 44

SEC Charges Firms Involved in Layering,

Manipulation Schemes
• On March 10, 2017, SEC filed a complaint against Lek
Securities Corporation, Samuel Lek, Vali Management Partners
dba Avalon FA Ltd., Nathan Fayyer and Sergey Pustelnik.
• The SEC’s complaint alleges that Avalon FA Ltd touted itself as
a destination to engage in layering, a scheme in which orders
are placed but later canceled after tricking others into buying or
selling stocks at artificial prices. Avalon allegedly made more
than $21 million in the layering scheme involving U.S. stocks
during a five-year period. Avalon also made more than $7
million through a cross-market manipulation scheme in which
the firm bought and sold U.S. stocks at a loss in order to
manipulate the prices of the stock and its corresponding
options in order to profitably trade at artificial prices. Avalon
allegedly used traders in Eastern Europe and Asia to conduct
its cross market trading.
 45

Layering case cont.

• The SEC further alleges that Lek Securities and its owner
Samuel Lek made the schemes possible by providing
Avalon with access to the U.S. markets, approving the
cross-market trading scheme, and improving its trading
technology to assist Avalon’s trading. According to the
SEC’s complaint, Lek Securities also relaxed its layering
controls after Avalon complained. Avalon was the
highest-producing customer for Lek Securities in terms of
trading commissions, fees, and rebates generated
 46

New Orleans-Based Energy Company Charged

With Fraudulent Stock Manipulation
• In December 2014, the SEC charged New Orleans-based
oil-and-gas company and 5 executives with running a
stock trading scheme in order to manipulate the price of
the company’s stock
• The company issued deceptive press releases claiming
to have struck oil in Belize and Texas to induce investor
demand for its unregistered stock, and then illegally sold
restricted shares to the public
• The company’s stock price shot up nearly 80% the day
of the press release
 47

New Orleans-Based Energy Company Charged

With Fraudulent Stock Manipulation
• In the last leg of the scheme, the company began offering
investors a working interest in well in Texas
• Investors were enticed with claims that the working
interests were low-risk and expected to yield a return of
111.42% over a 10-year period
• The SEC alleges that the company knew these claims
were baseless, because the well was producing only
marginal amounts of oil
• The SEC also charged a Houston attorney with
facilitating the scheme by issuing false legal opinion
letters that allowed free trading of the restricted company
stock
 48

SEC’s First High Frequency Trading Manipulation

Case
• In October 2014, the SEC sanctioned a New York City-
based high frequency trading firm for placing a large
number of aggressive, rapid-fire trades in the final two
seconds of almost every trading day during a six-month
period to manipulate the closing prices of thousands of
NASDAQ-listed stocks
• The firm, Athena Capital Research, used an algorithm
code named “Gravy” to engage in a practice commonly
known as “marking the close”
• “Gravy” overwhelms the market’s available liquidity and
artificially pushes the closing price in Athena’s favor,
making Athena the dominant firm
 49

SEC’s First High Frequency Trading Manipulation

Case
• Athena also implemented additional algorithms known as
“collars” to ensure that the firm’s orders received priority
over other orders when trading stock imbalances.
• Athena knew of this price impact and in internal emails
called it “owning the game”
• Traders can undoubtedly use complex algorithms and
take advantage of cutting-edge technology, but what
happened here was fraud
• The firm violated section 10(b) of the Securities and
Exchange Act