Enforcement News: Don’t Get Spoofed Again

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Posted on: Oct 9 2024

“Spoofing is a type of scam in which criminals attempt to obtain someone’s personal information by pretending to be a legitimate business, a neighbor, or some other innocent party.”[1] Spoofing can occur in any form of online communication, including emails, text messages, telephone calls, and websites. Id. Although spoofing comes in many forms, the goal of spoofing is the same: to deceive people into divulging personal and/or financial information that the scammers can exploit for their personal gain.

Common Spoofing Scams

Email Spoofing

Also known as “phishing”, email spoofing involves the transmission of emails having a falsified “From:” line. The point of the email is to trick the recipient into believing that the message comes from a legitimate source, such as a friend, a bank, or some other known business or entity.

Text Message Spoofing

Also known as “smishing”, text message spoofing is like email spoofing. The recipient receives a text message that appears to come from a legitimate source, such as a friend or the recipient’s bank, credit card company or phone company. The message typically requests the recipient to call a certain phone number or click on a link within the message, with the goal of inducing the recipient to divulge personal information.

Caller ID Spoofing

With Caller ID spoofing, the scammer falsifies the phone number from which he/she is calling to get the victim to take the call. The victim’s caller ID will show that the call is coming from a legitimate business or government agency, such as the Internal Revenue Service. As with other forms of spoofing, the goal of the scam is to induce the victim to divulge personal and/or financial information.

[Ed. Note: the IRS says that it does not call taxpayers to tell them they owe taxes or are the target of an inquiry or investigation without first sending them correspondence in the mail.]

URL Spoofing

URL spoofing occurs when scammers create a fraudulent website to obtain information from victims or to install malware on their computers. For instance, victims might be directed to a website that appears to belong to their bank or credit card company and be asked to log in using their user ID and password. If the person falls for the request and logs in, the scammer has the victim’s information to log into the website of the legitimate entity or government agency and access the victim’s accounts. See Spoofing, supra.

Market Spoofing

“Spoofing” can also include a series of events in which a securities trader places and immediately cancels a quote in an attempt to trigger a market movement that the [trader] then takes advantage of to establish or liquidate a position. State differently, it is an act or practice of bidding or offering with the intent, at the time the bid or offer was placed, to cancel the bid or offer before it was executed to give the false appearance of genuine supply or demand to other market participants.

Market spoofing is the subject of a settled enforcement proceeding commenced by the Securities and Exchange Commission (“SEC” or “Commission”) against TD Securities (USA) LLC, a registered broker- dealer that is headquartered in New York for allegedly spoofing the U.S. Treasury cash securities market by entering orders on one side of the market that it had no intention of executing (herein, “non-bona fide orders”).

The September 30, 2024, press release announcing the charges and settlement can be found here.

In the Matter of TD Securities (USA) LLC

According to the SEC, between April 2018 and May 2019, a former TD Securities trader spoofed the U.S. Treasury cash securities market by entering orders on one side of the market that he had no intention of executing, so he could obtain more favorable execution prices on bona fide orders he was entering simultaneously on the other side of the market. After the bona fide orders were filled, said the SEC, resulting in profits to TD Securities, the trader allegedly canceled the non-bona fide orders. The SEC found that TD Securities lacked adequate controls and that it failed to take reasonable steps to scrutinize the trader after receiving warnings of his potentially irregular trading activity.

TD Securities consented to the entry of the SEC’s cease and desist order finding that it violated an antifraud provision of the federal securities laws and failed to reasonably supervise the trader. TD Securities was further ordered to cease and desist from future violations of the relevant antifraud provision, was censured, and was ordered to pay disgorgement of $400,000, prejudgment interest, and a civil penalty of $6.5 million.

In a related matter, TD Securities entered into a deferred prosecution agreement (“DPA”) (here) with the U.S. Department of Justice (“DOJ”) and agreed to pay a total monetary sanction of more than $15 million as part of that agreement, of which $400,000 will be credited by disgorgement to the SEC (here).

TD Securities separately agreed to pay a $6 million fine to the Financial Industry Regulatory Authority to resolve related charges.

Commenting on the SEC’s enforcement action and settlement, Mark Cave, Associate Director in the SEC’s Division of Enforcement, stated: “Manipulative and deceptive trading undermines the integrity of our markets. Broker-dealers and other firms cannot ignore their employees’ manipulative conduct and must take meaningful steps to detect and prevent it. Today’s action results from our continuing commitment to combating illicit trading.”

Regarding the DPA, Nicole M. Argentieri, Principal Deputy Assistant Attorney General and head of the Justice Department’s Criminal Division stated: “TD Securities placed hundreds of orders to buy and sell U.S. Treasuries that it never intended to execute, in order to deceive market participants and manipulate prices by creating the false appearance of supply and demand. Such efforts to profit through unlawful trading undermine public confidence in U.S. Treasuries markets and defraud other market participants. The Criminal Division is committed to ensuring the integrity of our financial markets and holding accountable those who engage in deceptive trading practices.”

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] See Julia Kagan, Spoofing, Investopedia (updated June 29, 2024) (“Spoofing”) (here).