14 January 2015

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Layering Spoofing Fraud Canadian Man Charged in First Federal Securities Prosecution

Layering Spoofing Fraud Canadian Man Charged in First Federal Securities Prosecution
Know understand what is Layering Spoofing Stock Market Fraud

Canadian Man Charged in First Federal Securities Fraud Prosecution Involving ‘Layering’

Scheme Targeted U.S. Securities Markets and Involved Complex Web of Brokerage Accounts, Off-Shore Entities, and High-Speed Trading by Stock Traders in China and Korea


A Canadian man was arrested today for allegedly orchestrating a large-scale, international stock market manipulation scheme in the first federal prosecution of securities fraud involving a high-frequency trading strategy known as “layering,” U.S. Attorney Paul J. Fishman for the District of New Jersey announced.

Aleksandr Milrud, 50, of Ontario, Canada, and Aventura, Florida, is charged by complaint with one count of conspiracy to commit securities fraud and one count of wire fraud. FBI agents arrested Milrud at his residence in Aventura this morning. He is scheduled to appear this afternoon before U.S. Magistrate Judge John J. O’Sullivan in federal court in Miami.

“As our complaint shows, illegally manipulating markets to cause even small price changes can yield large gains when done on a massive scale,” U.S. Attorney Fishman said. “The defendant and his far-flung network of conspirators operated an international scheme in which they generated millions of dollars in illicit profits for themselves with artificial trade orders executed at high speeds.”

“As alleged in the complaint, Mildrud was the engineer behind a sophisticated, international, groundbreaking market manipulation scheme that utilized an illicit, high-speed trading strategy to execute trades,” said Special Agent in Charge Aaron T. Ford of the FBI in Newark, New Jersey. “The losses to investors due to this innovative fraud could be in the millions. The FBI will continue to identify and investigate frauds such as this one, in order to ensure a level playing field for all investors.”

According to the complaint unsealed today:

Milrud allegedly orchestrated an extensive and sophisticated international layering scheme that, according to him, yielded millions of dollars in illicit profits. Layering, also known as “spoofing,” is a form of manipulative, high-speed stock trading in which a trader places non-bona fide orders to buy or sell securities and then quickly cancels them before they are executed.

The purpose of these non-bona fide orders is to artificially move the price of security up (in the case of non-bona fide buy orders) or down (in the case of non-bona fide sell orders) and to induce other market participants to buy or sell a security at a price not representative of actual supply or demand.

While the non-bona fide orders are pending, the trader simultaneously executes trades in an attempt to profit from the artificial movement of the share price that the trader has created. Milrud’s layering scheme targeted U.S. securities markets and involved high-speed trading through numerous brokerage accounts and foreign traders that Milrud recruited and managed in China and Korea.

In January 2013, Milrud solicited the assistance of an individual who owned an off-shore broker-dealer (the Foreign-BD) but who, unbeknownst to Milrud, was a cooperating witness (CW) with law enforcement. Milrud sought to open a trading account at the Foreign-BD for use in his layering scheme.

Over the course of several consensually recorded calls and meetings between the CW, Milrud and others, Milrud explained his illegal trading strategies in detail. Milrud said he controlled approximately 60 percent of all China-based traders engaged in layering, that his traders used various trading accounts that were not tied to Milrud in any manner and that the layering scheme generated millions of dollars in illicit profits.

Milrud explained that to enable his traders to place and cancel many orders quickly, he worked with a software company on programming “hotkeys” – shortcuts for placing and cancelling multiple orders quickly with few keystrokes. Milrud also explained his efforts to avoid detection by law enforcement and regulators, including not discussing business on the phone, communicating through third party liaisons, and using multiple trading and clearing firms and accounts to execute a single securities transaction, a practice he described as “shredding.”

On Aug. 27, 2014, Milrud met the CW at the offices of the Foreign-BD. The meeting was video and audio recorded by law enforcement.

Milrud explained his layering scheme in more detail.

Milrud stated that overseas stock traders who he controlled simultaneously utilized at least two trading accounts to execute the layering scheme; one account was used to conduct the manipulative layering trading (the Layering Account), which Milrud referred to as the “dirty work,” and another “clean” account (the Profit Account) was used to buy or sell the manipulated stock at a profit during the small window of time in which the stock price had been artificially moved by the “dirty” activity in the Layering Account.

According to Milrud, his foreign traders logged into these accounts from different computers and different Internet protocol (IP) addresses so that it would not appear as if the same individual was trading through the two accounts and to evade automated fraud detection systems established by the trading platforms. After explaining his manipulative trading strategy, Milrud said, “Regular trading. If I didn’t tell you what I just told you, it would seem like regular trading – you would not know nothing of what I do.” The CW replied, “Will look just like regular buying and selling?” Milrud responded, “Exactly. One hundred percent kosher. If I didn’t tell you everything behind it, you have no way of [knowing].”

During the Aug. 27, 2014, meeting, Milrud agreed to log into his trading platform using the CW’s computer to show the CW his traders’ activity in real time. The CW had been provided by law enforcement with a laptop computer (the FBI Computer), which included software that recorded all activity and keystrokes on the computer. Milrud logged into and remotely accessed his trading system using the FBI Computer. According to Milrud, his overseas traders were controlling the orders and trades that he and the CW were observing on the FBI Computer. The CW then observed multiple real time trades in a number of different securities in both the Layering and Profit Accounts, and orders being placed and cancelled, while Milrud narrated.

According to Milrud’s statements to the CW during a consensually recorded call on Dec. 15, 2014, the scheme could generate anywhere from $1 million to $50 million per month and had yielded approximately $600,000 in a single day in recent weeks. The investigation is ongoing and law enforcement continues to investigate the brokerage accounts, trader identification numbers that Milrud used to carry out the scheme and the full scope of the illicit profits.

The conspiracy count with which Milrud is charged carries a statutory maximum sentence of five years in prison and a $250,000 fine, or twice the gain or loss from the offense. The wire fraud count carries a statutory maximum sentence of 20 years in prison and a $250,000 fine, or twice the gain or loss from the offense.

U.S. Attorney Fishman credited special agents of the FBI, under the direction of Special Agent in Charge Aaron T. Ford in Newark, for the investigation leading to today’s arrest and complaint. He also thanked the U.S. Securities and Exchange Commission’s Market Abuse Unit, under the direction of Daniel M. Hawke, for its role in the case.

The government is represented by Chief Gurbir S. Grewal and Assistant U.S. Attorney Nicholas P. Grippo of the U.S. Attorney’s Office Economic Crimes Unit .

The charges and allegations contained in the complaint are merely accusations, and the defendants are presumed innocent unless and until proven guilty.

Source – FBI

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Wednesday, January 14, 2015

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