Enforcement News: SEC Charges Financial Services Professional and Associate with Perpetrating a Front-Running Scheme
Print Article- Posted on: Dec 28 2022
By: Jeffrey M. Haber
“Front-running” involves trading ahead of large, nonpublic orders of market participants to benefit from the market impact of those large orders. Large orders can have an impact on the price of a security when they cause an imbalance in the supply or demand for that security, thereby causing the price of that security to increase or decrease.
Front-running was the focus of an enforcement action that the Securities and Exchange Commission (“SEC”) brought on December 14, 2022.
On December 14, 2022, the SEC announced (here) that it brought fraud charges against an employee of a major asset management firm with securities portfolios worth billions of dollars (“Associate”), and a former financial service professional (“Professional”) for perpetrating a multi-year front-running scheme that generated at least $47 million in illegal trading profits.
The SEC alleged that, since at least September 2016, Associate would inform Professional of the asset management firm’s market-moving trades prior to their execution. As alleged in the complaint (here), on the same day, Professional would trade in the same securities prior to Associate’s employer or while multiple large orders were being placed by the employer. Professional would close his positions after the price of the security moved as expected. This alleged front-running scheme, said the SEC, resulted in proceeds of more than $47 million.
“[Associate] allegedly took advantage of his position and abused his employer’s trust by providing [Professional] with proprietary information that allowed them to gain a trading advantage and pocket tens of millions of dollars in profits,” said Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit. “As today’s action shows, SEC staff will utilize data analytics tools at our disposal to find and charge those who engage in illegal trading of securities.”
The SEC charged defendants with violating the antifraud provisions of the federal securities laws and seeks disgorgement of ill-gotten gains plus interest, penalties, and injunctive relief.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced (here) criminal charges against the defendants.
Commenting on the indictment, U.S. Attorney Damian Williams said: “By stealing confidential trade information from a major financial services organization, [Associate] betrayed the trust and confidence of his employer and schemed with [Professional] to make tens of millions of dollars of illegal profit. [Defendants] tried to cover their tracks by using burner phones and secret payments, but their scheme has now been laid bare.”
FBI Assistant Director in Charge Michael J. Driscoll also commented on the charge, stating: “As alleged, the defendants engaged in a years-long scheme in which [Associate] obtained information regarding his employer’s intent to make relatively large trades in certain stocks. In turn, this allowed [Professional] to trade in the same stocks in advance and realize substantial ill-gotten profits. These types of insider-trading schemes satisfy the greedy ambitions of nefarious actors at the expense of average investors. The FBI remains steadfast in our efforts to ensure our financial markets are a level playing field for all by bringing to justice those who would seek to illegally exploit them.”
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.
