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U.S. Government Prosecutes First “Layering” Securities Fraud Scheme

February 5, 2015 — Layering, or “spoofing,” is a type of securities fraud that manipulates the market through high-speed stock trading. A trader places phony orders to purchase or sell securities but then cancels the orders before they can be executed. The activity artificially moves share prices up for “non-bona fide buy orders” and down for “non-bona fide sell orders.” The price fluctuations lead market investors to purchase or sell shares at a price that does not accurately reflect true supply and demand. While the rigged orders are pending, the unscrupulous trader executes other trades to capitalize on the artificial share price that he himself created through layering.

To help fight layering schemes such as this one, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 instituted a whistleblower program authorizing awards for informants who alert the Securities and Exchange Commission (SEC) to credible, specific and timely information concerning an imminent or ongoing fraudulent scheme. Whistleblowers could receive from ten to thirty percent of the amount the government recovers, provided the amount exceeds $1 million.

Canadian Charged in Alleged “Layering” Operation that Traded in U.S. Stocks Using Accounts and Traders in China and Korea

A Canadian man who allegedly masterminded a “layering” high-frequency international stock trading scheme has been arrested. Aleksandr Milrud, who also maintains a residence in Florida, has been charged with securities fraud and wire fraud. The alleged layering scheme, which involved trading in U.S. securities markets using brokerage accounts and traders in China and Korea, reportedly brought in illicit profits for Milrud that amounted to millions of dollars.

In January 2013, Milrud’s scheme came to light after he recruited the owner of an off-shore broker-dealer who was actually collaborating with law enforcement. Milrud told the informant that he worked with a large number of traders in China who were engaged in layering and that the trading accounts could not be linked to Milrud. His traders were able to quickly place and cancel orders by using “hotkeys” on their computers that were designed by a software company. To conceal the activity from securities regulators and law enforcement, Milrud’s traders ran securities transactions through several accounts in different trading and clearing firms, a process Milrud referred to as “shredding.”

In a December 2014 phone call that was consensually recorded, Milrud told the government’s informant that the layering operation could yield between $1 million and $50 million in just a month’s time.

Whistleblowers Notify SEC of Layering or Spoofing Violations

While Waters & Kraus was not working with the whistleblower on this layering matter, we are representing tipsters in other instances of SEC fraud. If you have comparable claims against your employer or anyone else engaged in securities fraud, contact us or call our qui tam attorneys at 855.784.0268 to learn more about our practice and how we can work together to notify the government about SEC fraud and abuse. Our qui tam lawyers, George Tankardand Anne Izzo in our Maryland office, are committed to advancing and protecting informants’ interests in whistleblower lawsuits.

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