The Securities and Exchange Commission has charged the owner of the brokerage firm Visionary Trading LLC with manipulative trading of publicly traded stocks. Regulators also charged Joseph Dondero and others with registration violations. In all, five individuals and two firms will pay a collective $3 million to settle the charges.
SEC explains layering
In the press release, the SEC explains how the so-called “layering” practice works. The trader orders stocks without intending them to actually be executive, but rather, to trick others into either selling or buying a stock at an “artificial price driven by the orders,” which the trader cancels later.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
According to regulators, Visionary Trading co-owner Joseph Dondero caused fluctuations in the national bid or offer of stocks, increased the depth of order books and used the fake orders to “send false signals to other market participants who misinterpreted the layering as true demand for the stock.”
Details on the SEC charges
In addition to charging Dondero with using this practice, the SEC also charged him, his firm and three other owners with operating an unregistered brokerage firms. Regulators also filed charges of aiding and abetting against Lightspeed Trading LLC. Lightspeed’s former chief operating officer also faces charges with failing to supervise a Visionary owner who shared his commission payments from Lightspeed with his co-owners while also working as a registered representative there.
Regulators say the actions occurred between May 2008 and November 2011. They say Dondero, as well as Eugene Giaquinto, Lee Heiss and Jason Medvin—all of whom own Visionary Trading—received some of the commissions from Lightspeed which were generated from trading by customers of Visionary.
They say Lightspeed aided Visionary’s violations by ignoring the red flags which suggested that Visionary and all of its owners were receiving transaction-based compensation without being registered as brokers or dealers or being associated with a firm that is registered as a broker-dealer. The SEC also said Lightspeed did not establish proper policies and procedures to detect and prevent improper commission sharing.
SEC settles for $3 million
In order to settle the charges, Dondero agreed to pay more than $1.1 million plus $46,792 I prejudgment interest and $785,000 in penalties, adding up to more than $1.9 million. He also agreed to be barred from the securities industry.
Giaquinto, Heiss and Medvin will each pay more than $118,000 plus nearly $15,000 in prejudgment interest and a $35,000 penalty. The SEC has barred them from the securities industry for at least two years.
Lightspeed will pay $330,000 plus $43,316 in prejudgment interest and post-order interest of almost $5,000 and a $100,000 penalty. Andrew Actman, former COO of Lightspeed, agreed to pay a $10,000 penalty and to be subject to a supervisory bar for at least a year.
This appears to be the first high frequency related charge since Michael Lewis’s new book caused a heated debate over the issue. But will it be the last?