SEC Obtains Final Judgment in AutoChina International Market Manipulation Case
Back in 2012 we wrote about the Securities Exchange Commission’s (SEC) action against AutoChina International Limited in a blog titled “Market Manipulation and ‘Noneconomical Trading.‘” We found that case particularly interesting because in its complaint the SEC went as far as to define noneconomical trading, washed trades, and matched orders. For those who are unfamiliar with those terms, the SEC defined them as follows:
Matched Order: In this complaint, the SEC defines a “matched order” as when trades are coordinated for the purchase or sale of a security. Essentially an order is placed with the knowledge that another order (or orders) of substantially the same size, at substantially the same time, and at substantially the same price, has been or will be entered.
Washed Trade: In this complaint, the SEC defines a “washed trade” as trades where there is no change in beneficial ownership. Essentially when you sort through the accounts the same person either owns the accounts, or the companies behind the accounts, or provided the money to the front people whose names the accounts are in.
NonEconomical Trading: In this complaint, the SEC defines “noneconomical trading” as trading for which there is no economic rationale.
On June 27th, the SEC announced that the court entered a judgment against AutocChina and its senior executive, ordering them to pay a $4.35 million penalty. A copy of that litigation release can be found at: http://www.sec.gov/litigation/litreleases/2014/lr23033.htm
We did review the court filings in this case, and it looks like the defendants entered into consent judgements, and the SEC’s litigation action remains pending against 10 other defendants. Our guess is that it will not go well for the other defendants in this case, due to the company and its primary executive consenting to a judgment being entered against them.
One of the things that we initially liked about this litigation was that the SEC actually defined specific forms of market manipulation, something that we find lacking in far too many of the complaints filed by the SEC. One issue we have with various securities regulations, is that far too often they not well defined or vague. We understand that this may provide the SEC with a certain advantage when it comes to enforcement. However, we also think it creates disadvantages as well. One of these disadvantages is that a lack of clearly defined or vague regulations leaves them open to a wide range of interpretations and uneven applications across the various regional offices of the SEC. In some instances this may even lead to situations where newer staff members may not properly understand or know the rules and regulations they are expected to enforce. I can clearly remember one situation where I was speaking with a SEC staff attorney in the enforcement division regarding some trading activity we both were examining and I stated that it was clearly an example of “parking stock,” to which he replied “what is that?” To my surprise he admitted that he had never heard the term before, or had any idea what it was.
For those who are unfamiliar with the term ‘parking stock,’ it is generally defined as occurring when party has a second party temporarily buy stock that it is unable to buy then sell those shares back to the 1st party or one of their clients. This may be done for a variety of reasons, including evading margin requirements and attempts at illicit market stabilization activities. A good example of this is when a stock promoter is unable or unwilling to use his own capital to buy a company’s shares and instead has one of his supposed clients buy the shares, with an understanding that the promoter will find a another buyer to buy the shares within a few days. Usually the promoter will guarantee to buy the shares at a profit or make the client whole on any losses. Usually the promoter is doing this in an attempt to stabilize the price of the company’s shares in the market.
What I feel is important, is that in more of the complaints that the SEC files, it needs to clearly define what it considers to be violations of its various rules and regulations. The more clearly they defined, the harder time the bad actors in the industry will have in evading them.
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We do applaud the SEC ‘s efforts to police this type of activities.