U.S. authorities have charged four men for allegedly defrauding brokerage firms in a “free-riding” scheme that netted them more than US$2 million in illicit profits.
The U.S. Securities and Exchange Commission (SEC) brought fraud charges against Eduardo Hernandez, Christopher Flagg, Daquan Lloyd and Corey Ortiz on Tuesday.
The regulator alleged that the scheme involved opening brokerage accounts that offered instant deposit credits, which the four men used to buy illiquid securities at inflated prices from other accounts they controlled, generating profits in the other accounts.
Later, the existing accounts bought back the securities at lower prices, “closing out the positions and leaving the victim accounts with trading losses close to the amount of the instant deposit credits,” the SEC alleged.
The new accounts were then abandoned, leaving the brokerage firm with the losses.
In total, the SEC alleged that the men recruited people to open more than 600 sham accounts as part of the scheme.
“As alleged, the SEC uncovered that the defendants sought to enrich themselves by placing losing trades in hundreds of unfunded brokerage accounts that they later abandoned, leaving the brokerage firm to bear the cost,” said Joseph Sansone, chief of the SEC’s market abuse unit, in a release.
In a parallel action, the U.S. attorney’s office for the Eastern District of New York also charged the four men with conspiracy to commit securities fraud and money laundering conspiracy.
None of the allegations have been proven.
Three of the men have been arrested and were scheduled to be arraigned in federal court. The fourth accused man remains at large.