At least 10 broker-dealers - mostly in New York and New Jersey - were duped by 2 Florida residents who fraudulently posed as money managers for hedge funds or private investors.  The pair opened up at least 15 RVP-DVP accounts over 2 separate time frames, which they used to conduct an illegal "free-riding" scheme - causing over $2 million in losses to the broker-dealers, and generating over $600,000 in illicit trading profits. Initiating the Scheme. Holding themselves out as money managers for hedge funds or private investors, Scott Kupersmith and Frederick Chelly opened RVP-DVP brokerage accounts for corporate entities they controlled.  In each case, the broker-dealer offered the accounts on the falsely representations that they held sufficient securities and cash with a 3rd party custodial bank to cover the trades they executed in the DVP accounts. Kupersmith and Chelly did so by  to broker-dealers or otherwise led them to believe that they held securities and other assets in a custodial account with a third-party custody bank, when, in fact, they did not own the stock that they sold and had insufficient funds to pay for the stock that they purchased when they placed orders in many instances. Instead, they used the proceeds from sales of shares to pay for the purchase of those same shares. Kupersmith and Chelly never disclosed this fact to broker-dealers. Let the Trading Begin. According to the SEC's complaint, the free-riding scheme occurred in 2009 and 2010, and unraveled when Kupersmith and Chelly failed to deliver shares to settle long sales in various brokerage accounts.  They then engaged in illegal free-riding by interchangeably buying and selling the same quantity of the same stock in different accounts - frequently on the same day - with the intention of profiting on swings up or down in the stock price.  Using different accounts also helped them avoid detection. Unbeknownst to broker-dealers, Kupersmith and Chelly did not have sufficient securities or cash on hand to cover the trades, and they instead used proceeds from stock sales in one brokerage account to pay for the purchase of the same stock in another brokerage account. The SEC alleges that when trades were profitable, Kupersmith and Chelly took the profits. But when the trades threatened to result in substantial losses, Kupersmith and Chelly failed to cover their sales and left broker-dealers to settle the trades at a significant loss. In total, their brokers suffered more than $2 million in losing trades. Beginning of the End. The scheme unraveled when Kupersmith and Chelly began to fail to deliver shares to settle sales in various brokerage accounts.  In engaging in their corresponding or offsetting trades, Kupersmith and Chelly had intended to profit from either:  (i) an increase in stock price by purchasing and then reselling shares at a higher price;  or, (ii) a drop in stock price by selling shares and then purchasing them or covering the sale at a lower price. But when certain of the stocks that they had sold rose in price, Kupersmith and Chelly would have been forced to purchase shares at the higher price to settle the sale transactions. That's when they walked away from the brokerage accounts.  Rather than purchasing the shares to cover the sales, and to avoid the resulting losses, Kupersmith and Chelly simply failed to deliver those securities and their sales "failed." The broker-dealers were forced to "buy-in" or to purchase replacement shares to cover or settle the sale transactions.  Because the firms frequently had to buy-in at higher prices than the shares were sold, the broker-dealers suffered losses equivalent to the amount by which their "buy-in" costs exceeded the proceeds from the sale. Extending the Scheme.   Between May 2009 and October 2009, the pair traded in RVP-DVP accounts for two of their controlled entities.  When the firms halted trading in those accounts, Kupersmith and Chelly went to other broker-dealers and opened accounts through two other entities they controlled.  The 2nd phase of their scheme ran from July 2010 through October 2010. SEC Charges. Kupersmith and Chelly with violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rules 10b-5 and 10b-21 thereunder.  The SEC seeks to disgorge them of their ill-gotten gains plus prejudgment interest and pay financial penalties. Good luck.   For further details, go to:   [SEC Litigation Release 22142, 10/28/11]  and [SEC Complaint]