[ by Howard Haykin ]

The SEC's investigation of Hold Brothers On-Line Investment Services - related to the joint investigation by FINRA, and 4 Exchanges - Arca, BAT, Nasdaq, Nasdaq Boston - resulted in separate sanctions against the brokerage firm and 3 executives.  (To read about FINRA's investigation, go to:  [C-I 9/25/12 WWW posting, "Six Regulators: One Joint .."]).  All were charged with allowing traders outside the U.S. to access the markets and conduct manipulative trading through accounts the firm controlled. 

Individuals and Entities Charged. As was reported by FINRA, the SEC found that Hold Brothers On-Line Investment Services allegedly ignored red flags indicating that overseas traders were accessing the markets through the firm’s customer accounts and repeatedly manipulating publicly-traded stocks through an illegal practice known as "layering" or "spoofing."   In layering, the trader places orders with no intention of having them executed but rather to trick others into buying or selling a stock at an artificial price driven by the orders that the trader later cancels.

Hold Brothers’ president and co-founder Steve Hold, former CCO and CFO Robert Vallone, and a 3rd executive William Tobias were aware of several e-mails and other indications that manipulative trading was occurring through Hold Brothers accounts, yet they failed to properly investigate the warning signs and recklessly continued to provide overseas traders with buying power and access to the U.S. markets.

Two Hold Brothers customers - Trade Alpha Corporate Ltd. and Demostrate LLC, each a foreign company - also were charged because their accounts were used for the manipulative trading.  Both companies were created and partially owned by Steve Hold.   So, essentially, Hold provided the capital for the manipulative trading by the overseas traders.

“Manipulation, whether executed by e-mail, instant message, or multiple phantom orders, is still manipulation. Traders and the firms that provide them market access should not labor under the illusion that illegally layering orders amidst voluminous trading data will somehow allow them to evade detection by the SEC.”  -- Robert Khuzami, SEC Enforcement Director.

SEC Findings and Allegations. The manipulative trading allegedly occurred from at least January 2009 to September 2010.  Hold Brothers’ primary business was to provide market access to its customers’ traders, a majority of whom were located overseas.  The vast majority of these overseas traders traded for Trade Alpha and Demostrate.

The layering strategy used by the overseas traders typically followed the same pattern. Traders placed a bona fide order that was intended to be executed on one side of the market (buy or sell). The traders then immediately entered numerous non-bona fide orders on the opposite side of the market for the purpose of attracting interest to the bona fide order and artificially improving or depressing the bid or ask price of the security. The nature of these non-bona fide orders was to induce other traders to execute against the initial, bona fide order. Immediately after the execution against the bona fide order, the overseas traders canceled the open non-bona fide orders, and repeated this strategy on the opposite side of the market to close out the position.

Violations Charged and SEC Sanctions. Hold Brothers willfully violated Sections 9(a)(2) and 17(a) of the Securities Exchange Act of 1934 and Rules 17a-4 and 17a-8, and failed reasonably to supervise its associated persons, the overseas traders, with a view to preventing and detecting their violations. The order also finds that Demostrate and Trade Alpha violated Section 9(a)(2) of the Exchange Act. The order finds that each of the individual respondents willfully aided and abetted and caused each entity’s violations of Section 9(a)(2) of the Exchange Act, and that Steve Hold failed reasonably to supervise Vallone.

The 6 individuals and entities agreed to pay a total of $4 million in disgorgement and penalties to settle the charges.  They neither admitted nor denied the findings.

• Hold Brothers agreed to pay $635,000 in disgorgement and interest, nearly $1.9 million in penalties. 
• Trade Alpha and Demostrate have agreed to pay more than $1.25 million in disgorgement.
• Hold, Vallone, and Tobias each agreed to pay $75,000 penalties and accept 3-year or 2-year bars from the industry (3 years for Vallone and Tobias). Hold further agreed to a 3-year bar from acting in a supervisory capacity.

SEC Staff Credits.  Investigation by Jason Burt and Thomas Smith of the Market Abuse Unit;  supervised by unit’s chief Daniel Hawke and deputy chief Sanjay Wadhwa.

For further details, go to:  [SEC PR 12-197, 9/25/12] and [SEC's Related  Order].