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SEC Charges Firms Involved in Layering, Manipulation Schemes.

Article By : Patrick Mansfield | U.S. Consumer Finance
SEC Whistleblower program

A trading firm based out of the Ukraine has been charged with fraud in connection with their manipulation of the United States' stock markets. They have allegedly made hundreds of thousands of manipulations during their tenure, and the charges levied against them by the Securities and Exchange Commission include charges against a brokerage firm based out of New York and its CEO, who was responsible for making the manipulations possible.

According to the complaint filed by the SEC, Avalon FA Ltd advertised itself to stock traders as a firm where they could engage in a layering scheme, which basically is the idea that a firm places orders for stocks but then cancels the orders before they have gone through, but not before they have tricked outside parties into either selling or buying stocks at false prices. This results in profits gained through obviously illicit means of deception and manipulation.

During five years, Avalon supposedly made over $21 million using their layering scheme to manipulate the U.S. stock market. The complaint filed by the SEC also details another $7 million in illegal profits made by using a cross-market manipulation scheme. In that scheme, U.S. stocks were bought and sold at a loss, which manipulated the price of the stocks and their options. The result was that the stocks could then be traded profitably at artificially high prices. Despite being based in the Ukraine, Avalon employed traders throughout Asia and Eastern Europe, and the business collected a percentage of the profits from the activities. They also collected commissions from their traders for the use of their platform.

Fraud charges were also filed against the named owner of Avalon, Nathan Fayyer, and Sergey Pustelnik, who had a controlling stake in Avalon but failed to disclose it. Instead, he registered as a representative of Lek Securities, an American firm that helped facilitate the layering scheme.

The layering scheme was only made possible, according to the SEC, due to the position of Lek Securities and Samuel Lek, the owner of the company. The company allowed Avalon to have access to the stock markets within the United States, and it also approved the cross-market trading scheme. Not only that, but the company even upgraded its infrastructure to better deal with the volume and style of Avalon's activities. There is even language in the complaint that alleges the layering controls put in place were relaxed by Lek Securities after a complaint came from Avalon. Lek Securities had a number of other customer firms, but Avalon led their clients in terms of trading commissions, generated rebates, and fees.

Stephanie Avakian, the Acting Director of the Division of Enforcement of the SEC, said that Avalon was not subtle about marketing themselves as a firm where manipulative trading would be possible, and Lek Securities was the gatekeeper that allowed the layering and manipulation schemes to take place in the markets of the United States. Lek Securities was warned repeatedly that their client was openly manipulating the markets, yet no action was taken on their part to prevent such activities.

The complaint was filed by the SEC in the United States District Court for the Southern District of New York, and shortly after the complaint was filed, the SEC received a court order that froze the assets of Avalon held by Lek Securities. The order also froze and repatriated monies that Avalon had previously transferred out of America.
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