SEC Investigation Cites 30 Market Makers For Fraud
By Jack Burney
06/16/2000 08:30 AM CST
(This is the sixth in a series of articles about secret market maker
manipulation of OTCBB stock prices, and the need for a rule to require
full disclosure of short positions in OTCBB stocks. Click on the
following links to read the other articles: Article 1, Article 2, Article 3,
Article 4, Article 5. If you know of such instances of MM suppression of
stocks, please tell us the story at jburney@otcnn.com)
Market maker manipulation is not just conjecture, no matter how MMs try
to hide their activities. The SEC investigated and charged 30 of them
with fraud and violations of the Act.
In Release No. 34-40900, the Securities Exchange Commission
published the findings of an investigation of market maker practices that
began in 1994, and instituted proceedings pursuant to Sections 15(b)
and 21C against 30 market-manipulating firms and individuals, and the
repercussions are still resonating.
This SEC release was the source of the taped telephone conversations
OTC News Network ran earlier this week. They are part of the SEC
investigation and part of the record.
?The most common form of violative activity uncovered by the (SEC)
staff?s investigation was the coordinated entry of bid and/or ask
quotations by market makers into the NASDAQ system for the purpose
of artificially affecting the price of subsequent transactions,? the
investigators said. ?Such coordinated activity constituted market
manipulation in violation of the antifraud provisions? of the Exchange
Act.
The manipulative conduct of the market makers, according to the SEC
release, ?was intended to increase the market makers? trading profits or
otherwise advance their proprietary interests, often at the expense of
their customers and other market participants.?
The SEC investigation uncovered ?anticompetitive and improper
practices? by market makers in violation of certain provisions of the
federal securities laws.
?Nasdaq market making firms and their traders? the investigators
charged, ?coordinated their trading and other activities with other market
makers to create false or misleading appearances in, or otherwise
artificially influence, the market for various Nasdaq stocks.
The manipulative modus operandi: One market maker would ask
another to move its quoted prices in order to create a different
appearance to the market from which the requesting market maker
could benefit.
For example, a market maker needing to buy stock because of a short
inventory position, would ask another market maker to move his quote
downwards to join the inside ask. The purpose of the requested quote
movement was to signal a downward price trend. That way, potential
sellers would be misled into reducing their price expectations. After the
quote movement, the requesting market maker would buy the stock at a
lower price, at the expense of the seller.
That constituted market maker fraud, SEC investigators charged, in
violation of Section 15(c)(1) of the Exchange Act and Rule 15c1-2
thereunder, and the prohibition against fictitious quotations provided in
Section 15(c)(2) and Rule 15c2-7 thereunder.
Market maker manipulation ? MMM ? saw MMs failing on three scores:
(1) to provide the ?best execution? of customer orders, intentionally
delaying trade reports, (2) to honor their quoted prices, (3) to create or
maintain required books and records.
Market maker misconduct was typically, but not always, limited in
duration and scope to intraday violations relating to particular stocks, but
cumulatively had a detrimental impact on the fairness and efficient
functioning of the Nasdaq market.
The SEC charges relate specifically to Nasdaq stock trading, which is
supposed to be closely regulated. Just imagine what the MMs did when
no disclosure was required, as with OTCBB stocks.
The investigation also leads one to surmise that the cancer of MMM is
far more widespread than originally believed, and that these arrogant
?pros? aren?t smart enough to make money in the market legally.
Each of the market maker respondents submitted an Offer of
Settlement which was included in the SEC?s Orders Making Findings
and Imposing Sanctions, and which the Commission agreed to accept.
The SEC added that all of the respondents did not engage in every
type of violative conduct described.
For the list of ?respondents? and the text of the whole investigative
report, go to www.sec.gov and Release No. 34-40900.
Though that phase of the SEC effort was completed, the ramifications
continue.
(Coming next week: a report on what the SEC is currently doing to
eradicate rampant MMM, and how you can join the cause.) |
