Four Long Island men charged with $2M “free-riding” scheme

The SEC alleges that, from approximately November 2018 through January 2022, the defendants opened brokerage accounts (the victim accounts) that provided the defendants an instant deposit credit once the defendants initiated a transfer of funds to those accounts from related bank accounts, but before the fund transfer was completed. The complaint alleges that, during this short window of time between initiating the transfer and when the bank funds reached the victim accounts, the defendants took advantage of the instant deposit credit feature to purchase illiquid securities from other brokerage accounts that they controlled, for prices at which no rational investor would have purchased them, thereby generating profits in the other brokerage accounts. Later, usually on the same day, the defendants caused those other brokerage accounts to repurchase the same securities from the victim accounts at or near the much lower market price, thereby closing out the positions and leaving the victim accounts with trading losses close to the amount of the instant deposit credits extended to the victim accounts. The defendants then allegedly directed that the victim accounts be abandoned, never actually funding those accounts from the bank accounts. The complaint alleges that, through this scheme in which the defendants controlled both sides of the transactions, they were able to generate guaranteed profits at the victim accounts’ brokerage firm’s expense. All told, during the relevant period, defendants allegedly conducted the fraudulent scheme through at least 600 brokerage accounts.

“As alleged, the SEC uncovered that the defendants sought to enrich themselves by placing losing trades in hundreds of unfunded brokerage accounts that they later abandoned, leaving the brokerage firm to bear the cost,” said Joseph Sansone, Chief of the SEC’s Market Abuse Unit. “This fraudulent conduct undermines the integrity of our markets, and the SEC will continue to use data analysis to identify those who perpetrate these complex schemes and hold them accountable.”

The SEC’s complaint, filed in U.S. District Court for the Eastern District of New York, charges Hernandez and Flagg with violating the antifraud provisions of the Securities Exchange Act of 1934 and Ortiz and Lloyd with aiding and abetting those violations. The SEC also seeks permanent injunctive relief, conduct-based injunctions, disgorgement with prejudgment interest, and civil penalties. The U.S. Attorney’s Office for the Eastern District of New York today announced parallel criminal charges.

The SEC’s ongoing investigation is being conducted by Cynthia Matthews, David Austin, Matthew Lambert, John Marino, Pat McCluskey, and Lindsay Moilanen of the New York Regional Office and the SEC Enforcement Division’s Market Abuse Unit and is being supervised by Mr. Sansone. The SEC’s Office of Market Intelligence provided assistance. The SEC’s litigation will be conducted by Ms. Matthews and Christopher Dunnigan. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York and the FBI.