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SEC And The Jerky Boys. I Don’t Gotta Audit You, Chisel-Chest!

I don’t need to talk to you, Jerky!
 - The Jerky Boys
 
Last on this week’s litany of SEC near-successes is the case of
SEC vs. Eric Todd Seiden.
 
According to the SEC complaint, “Seiden has fraudulently induced
at least fifteen broker-dealers to buy over $1.8 million of thinly-
traded stocks.”  How did he manage that, you ask?
 
“On numerous occasions from at least October 24, 2008 to the
present Seiden, a former securities professional, telephoned
broker-dealers, falsely identified himself as a customer or customer
representative, and place large orders to purchase a thinly-traded
stock for the customer’s account.”
 
Seiden, a 38-year old resident of Boca Raton, worked as a
registered representative from 1993 until October of 2008, which is
the month in which his alleged fraud started.  Seiden knows lots of
folks on Wall Street.  He has worked at a number of firms and
knows lots of folks, both professionally and socially.  Using the
names of individuals, and of customers that h has known off and
on over the years, Seiden allegedly placed calls to at least 24
different firms to have them buy large blocks of penny stocks. 
These trades would typically not be discovered as problems until at
least T+1, when they would be rejected for delivery by the firm
that allegedly placed the order.
 
One point that stands out in the SEC’s complaint is that the traders
and brokers at these firms all know Seiden.  Trading desk tapes
were played back for some of them, and they immediately
recognized his voice.
 
Another point that emerges – in the Prayer For Relief at the end of
the Compliant – is the SEC has not yet determined the purpose of
this behavior.  One would naturally assume that Seiden first
established positions in these illiquid stocks, then, by placing
fraudulent orders, created the liquidity to make his own positions
profitable.  But the SEC has not yet determined whether such
trades were ever done, so they only ask for disgorgement of any
illegal profits Seiden may have received from this activity.  We
find it curious that the SEC has not tracked down Seiden’s motive. 
This looks like the SEC moving swiftly to put a stop to fraudulent
behavior.  It may take more time to track down Seiden’s own
financial interest in this matter.
 
But the big kicker on all this – compliance officers take note – is
that these trades are not being reversed.  In each case, the name of
the broker or trader who allegedly gave the order was known to the
executing firm.  That is why Seiden gained access at all.  But it
was Seiden himself, and not the person whose name he used, who
placed the orders.  
 
Once this scam came to light, compliance officers and lawyers
from the brokerage firms were on the phone immediately to the
firms on the other sides of these trades, insisting that the trades be
broken.  
 
But trades are not being broken, and after a certain amount of
huffing and puffing, the calls are being abandoned and the trades
allowed to stand.
 
As with every scam – Madoff comes to mind – there were those
who did not take the bait.  There were firms that were approached
with orders from Seiden, and that declined to do the trades.
 
As to those firms that went through with it and made the
purchases, trades are being left to stand.  They are being told they
did not know their customer.