The US Attorney for the District of New Jersey recently filed criminal securities and wire fraud charges against a Canadian man, Aleksandr Milrud, alleging that he engaged in a fraudulent scheme to manipulate the stock market. The Securities and Exchange Commission filed parallel civil charges in the District of New Jersey.
“Layering,” also known as “spoofing,” is where a trader places orders to buy or sell securities, with no intent to execute the orders, in order to manipulate the price of the securities. While the manipulative orders are pending, the trader capitalizes on the price distortion caused by the trades and buys or sells the same securities, cancelling the manipulative trades before they are executed and profiting off the price movement created by the non-executed trades.
Milrud, the first trader to face federal criminal charges for using a layering scheme to manipulate equity markets, allegedly claimed to control 60 percent of all China-based traders engaged in layering and to have earned anywhere from $1 million to $50 million per month from the scheme. According to the criminal complaint, in January 2013, Milrud sought to open a trading account at a foreign broker-dealer to use in the layering scheme, but the broker-dealer was a cooperating witness with law enforcement. Over the course of several meetings,
Milrud allegedly explained the details of his scheme to the broker-dealer, including how he hired a gaming software company to program “hotkeys” to enable traders to quickly enter and cancel trades, and used two separate trading accounts, a “dirty” one for the manipulative trades and a “clean” one for the real trades. Milrud allegedly instructed his traders to use multiple computers, IP addresses, brokerage accounts, and clearing firms for a single transaction to hide it from government regulators. According to the criminal complaint, his scheme was documented when he demonstrated it to the cooperating witness using a computer provided to the witness by the FBI.
United States v. Milrud, Mag. No. 15-7001 (D.N.J. Jan. 12, 2015); SEC v. Milrud, No. 2:15-cv-00237 (D.N.J. Jan. 13, 2015).