A federal inmate serving time for operating a Ponzi scheme is now accused of defrauding brokerage firms by exploiting their provision of instant trading credits.

The U.S. Securities and Exchange Commission (SEC) charged six people — including Syed Arham Arbab, an inmate serving time for securities fraud — for conducting a so-called “free-riding” scheme that involved making fake deposits from empty bank accounts into online brokerage accounts to receive instant trading credits from the firms.

The SEC alleged that Arbab and five others made more than US$2 million in bogus deposits and received more than US$1.5 million in deposit credits that they then used to trade, causing the brokers to lose almost US$150,000.

Arbab allegedly carried out the scheme shortly before starting a five-year prison sentence for securities fraud in January 2021, stemming from a Ponzi scheme that he ran from his fraternity house at the University of Georgia.

In its complaint, the SEC said Arbab “was the architect of this scheme. In addition to engaging in his own free-riding, he also solicited dozens of individuals through group text messages and social media to engage in this fraud. While many rejected Arbab’s solicitations, others agreed to free-ride with him and thereafter either allowed him to free-ride in their accounts, or were coached by him to free-ride on their own.”

The allegations against Arbab have not been proven. Three other defendants agreed to settle the SEC’s charges without admitting or denying the allegations. Those settlements, which are subject to court approval, impose civil penalties and injunctions on future dealings with brokerage firms.

The regulator’s complaint seeks civil penalties, disgorgement, interest and other sanctions from the defendants.

“Securities traders who seek to cheat the market with fake deposits of money to make unfunded securities transactions will be held accountable for their deception,” said Justin Jeffries, associate director of enforcement in the SEC’s Atlanta office, in a release.

“Freeriding is not a victimless scheme, as broker-dealers form an integral part of the market and are protected from fraud under the federal securities laws.”