Lek Securities Corporation (“LEK”), a broker-dealer, and Samuel Lek, the firm’s principal owner and chief executive officer, vehemently opposed the motion of the Securities and Exchange Commission filed in March in a federal court in New York City, seeking a preliminary injunction against them for their role in allowing a customer, Avalon FA Ltd, to engage in purported manipulative trading activity through LEK. Separately, Avalon also filed papers opposing the entry of a preliminary injunction against it. In its enforcement action against LEK, Mr. Lek and Avalon, the SEC alleged that Avalon engaged in two types of manipulative conduct: layering and cross-market manipulation involving equities and related options from December 2010 through at least September 2016. The SEC said that LEK and Mr. Lek were aware of Avalon’s improper activities when, among other things, Mr. Lek received an email in May 2012 explicitly describing the layering scheme from an individual who shortly afterwards became an Avalon trade group leader, as well as when regulators, exchanges and other market participants alerted LEK and Mr. Lek on various occasions from 2012 through 2016 that they were concerned Avalon was engaging in layering. (Click here for details of the prior SEC action in the article “US Broker-Dealer, Its CEO and a Non-US Client Sued by SEC for Layering and Other Manipulative Schemes” in the March 12, 2017 edition of Bridging the Week.) In its opposition to the SEC’s motion, LEK and Mr. Lek denied any wrongdoing and claimed that the brokerage firm maintained a “robust program” to prevent layering by any of its clients, including Avalon. LEK, Mr. Lek and Avalon all claimed that Avalon’s alleged spoofing orders were legitimate and disseminated no false information to the market. The defendants argued that there was nothing “false” about any of Avalon’s orders, and that each alleged spoofing order was an order “Avalon was willing to engage in… at the order amounts submitted and necessarily would have been held to them if they had been accepted, which often happened.” Late last month, LEK and Mr. Lek were also charged in a disciplinary proceeding by the Financial Industry Regulatory Authority and 10 exchanges with aiding and abetting the alleged manipulative trading of Avalon, as well as other violations. (Click here for further details in the article “Following SEC Action, Broker-Dealer and CEO Also Charged by FINRA and 10 Securities Exchanges With Aiding and Abetting Client’s Layering, Spoofing and Cross-Market Manipulation” in the April 2, 2017 edition of Bridging the Week.)

Legal Weeds: The Securities and Exchange Commission’s enforcement action against LEK, Mr. Lek and Avalon principally charged violations of a general anti-fraud provision of law and a related SEC regulation (Click here to access Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5). Securities law and SEC regulations have no express prohibition against trading conduct sometimes referred to as “spoofing” or “layering.” This contrasts with derivatives law, where the Commodity Futures Trading Commission was provided with both an express anti-spoofing and general anti-fraud law in the Dodd-Frank Wall Street Reform and Consumer Protection Act, and afterwards enacted a regulation to parallel the general anti-fraud provision. (Click here to access Section 4c(a)(5) (7 US Code § 6c(a)(5)) and here for Section 6(c)(1) (7 US Code § 9(1)) of the Commodity Exchange Act, and here to access CFTC Rule 180.1.) The CFTC has referenced both provisions in enforcement actions that allege spoofing. (Click here for an example in the article “London-Based Futures Trader Arrested, Sued by CFTC and Criminally Charged With Contributing to the May 2010 “Flash Crash” Through Spoofing” in April 22, 2015 edition of Between Bridges.) Currently, a federal appeals court in Chicago is deciding whether the CEA’s anti-spoofing provision is unconstitutionally vague following a criminal action brought against Michael Coscia and his subsequent conviction and imprisonment. (Click here for background in the article “Federal District Court Approves Flash Crash Spoofer’s US $38 Million Settlement; Federal Appeals Court Appears Sympathetic to Michael Coscia’s Claim That Spoofing Prohibition Is Too Vague” in the November 20, 2016 edition of Bridging the Week.)