Two Securities Traders Charged In Scheme That Netted $26 Million In Illicit Profits
Manipulated $10 Billion Worth of Securities in Tens of Thousands of Transactions
NEWARK, N.J. – Two New Jersey-based securities traders were arrested today and charged with orchestrating a massive, long-running market manipulation scheme that netted them more than $26 million in illegal profits between 2014 and 2015, U.S. Attorney Paul J. Fishman announced.
Joseph Taub, 37, of Clifton, New Jersey, and Elazar Shmalo, 21, of Passaic, New Jersey, were each charged by complaint with one count of conspiracy to commit securities fraud. They are scheduled to appear later today before U.S. Magistrate Judge Steven C. Mannion in Newark federal court.
“As outlined in today’s complaint, Taub, Shmalo and others engaged in a scheme to place numerous buy and sell orders for specifically targeted, lightly traded securities in a coordinated fashion that allowed them to manipulate the price to their advantage,” U.S. Attorney Fishman said. “Over a period of years, they manipulated $10 billion worth of securities in this way, pocketing $26 million in illicit profits at the expense of other investors. The charges we filed today are part of our continuing effort to hold accountable those who would try to illegally tilt the playing field in their own favor.”
“The FBI is diligent in ensuring that anyone intent on corrupting the free market will be brought to justice,” Special Agent in Charge Timothy Gallagher of the FBI’s Newark Division said. “This type of behavior cheats the average investor and has a terrible impact on the securities industry.”
According to documents filed in this case and statements made in court:
From December 2013 to December 2016, Taub, Shmalo, and other conspirators allegedly orchestrated a sophisticated scheme to manipulate the prices of securities of numerous public companies by coordinating trading in dozens of brokerage accounts that the conspirators controlled. The defendants and their conspirators looked for companies whose securities had low trading volumes because it was easier to manipulate their prices. In this way, they injected false information into the market about the supply and demand of these securities, artificially inflating their prices. They then profited by selling at the artificially inflated prices the shares they had accumulated at lower prices.
In 2014 and 2015 alone, Taub, Shmalo and their conspirators engaged in more than 23,000 instances of manipulative trading, buying and selling $10 billion worth of securities and making more than $26 million in illegal profits.
The defendants and their conspirators relied on pre-arranged and coordinated trading among dozens of brokerage accounts they controlled. These accounts were held in the conspirators’ own names, the names of their family members, and the names of entities the conspirators controlled. Many of the accounts were opened in the names of individuals who neither controlled the accounts nor traded the securities held in the accounts (straw account holders). Taub funded many of the accounts that were not in his name and used the straw account holders to conceal the scheme from regulators and law enforcement.
The manipulative trading generally involved two or more trading accounts that bought and sold the same lightly traded stock on the same day during the same period of time. At least one account was primarily used to place multiple smaller orders to create upward or downward price pressure (the “helper account”) and at least one other account was primarily used to buy and sell larger quantities of stock (the “winner account”). The winner accounts profited by buying and selling at prices affected by the manipulative orders in the helper accounts. The helper and winner accounts were almost always held at different brokerage firms. The helper accounts frequently broke even or lost money, but in conjunction with the winner accounts, the conspirators profited overall.
The trading manipulations usually lasted just a few minutes each, during which time the conspirators sometimes controlled at least 80 percent of the volume of a targeted stock and traded in several accounts simultaneously. Most of the coordinated trading events involved dozens of orders and the purchase and sale of thousands of shares of targeted stocks. The defendants and their conspirators generated a net profit from these events more than 80 percent of the time.
The count of conspiracy to commit securities fraud with which the defendants are charged carries a maximum potential penalty of five years in prison and a fine the greater of $250,000 or twice the gain derived from the offense or twice the loss caused by the offense.
The U.S. Attorney’s Office is also planning to file a separate civil action seeking forfeiture of brokerage accounts in which the manipulative trades were executed, bank and brokerage accounts funded with proceeds of the scheme, and Taub’s interest in companies in which he invested the proceeds of the scheme. Civil forfeiture cases are “in rem” proceedings – proceedings against things. The forfeiture claims in this case are based on allegations that the forfeitable property is proceeds of the securities fraud scheme or is property involved in laundering the proceeds of the scheme.
In a separate civil action, the Securities and Exchange commission today filed a complaint in Newark federal court charging Taub and Shmalo with violating and aiding and abetting violations of the antifraud provisions of the securities laws. The complaint seeks a permanent injunction as well as the return of ill-gotten gains plus interest and penalties.
U.S. Attorney Fishman credited special agents of the FBI, under the direction of Special Agent in Charge Gallagher, with the investigation which led to today=s charges. He also thanked special agents of IRS-Criminal Investigations, the SEC and investigators from the U.S. Attorney’s Office – District of New Jersey, for their roles in the investigation.
The government is represented by Assistant U.S. Attorneys Daniel Shapiro and Zach Intrater of the U.S. Attorney’s Office Economic Crimes Unit in Newark; and Assistant U.S. Attorneys Sarah Devlin and Barbara Ward, Acting Chief of the office’s Asset Forfeiture and Money Laundering Unit.
The charge and allegations contained in the complaint are merely accusations, and the defendants are presumed innocent unless and until proven guilty.