Sec. & Exch. Comm'n v. O'Brien

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SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. JAMES DAVID O'BRIEN, Defendant.

No. 21cv9575 (DIC)

United States District Court, S.D. New York

May 25, 2023

For plaintiff Securities and Exchange Commission: Bennett Ellenbogen, Paul G. Gizzi, Chevon N. Walker, Richard R. Best

For defendant James David O'Brien: John M. Hanamirian, Esq. Hanamirian Law Firm

OPINION AND ORDER

DENISE COTE, DISTRICT JUDGE

The Securities and Exchange Commission ("SEC") brings this securities fraud action against James David O'Brien alleging that O'Brien engaged in a multimillion-dollar market manipulation scheme. On February 3, 2023, the parties settled with respect to injunctive relief and stipulated that any claim for monetary relief would be determined by the Court on a motion by the SEC. The SEC filed its motion for monetary relief on March 17. Based on the hearing held on May 19, and for the following reasons, the SEC s motion for monetary relief is largely granted.

Background

Before analyzing the appropriate amount of monetary relief, the background of this case is described. The first section outlines O'Brien's manipulation scheme, as articulated in the complaint.^[1] The second section explains the evidence relevant to monetary relief that was submitted in connection with this motion. The third section describes the procedural history in the case.

I. Allegations in the Complaint

A. O'Brien's Scheme

Between September 17, 2015 and at least October 29, 2020, O'Brien, a securities trader, engaged in an ongoing market manipulation scheme involving what the complaint calls "coordinated trading events." The complaint defines a coordinated trading event as follows:

• Two or more accounts trade and hold positions in the same exchange-traded stock, on the same day, and during the same period of time;

• The event starts when the first account trades and ends when all the involved accounts close out their positions (or when the trading day ends);

• At least one of the accounts behaves as a winner account -- an account that has an average transaction size greater than or equal to 1,000 shares; and

• At least one of the involved accounts behaves as a helper account -- an account that has an average transaction size of less than 500 shares and is held at a different brokerage firm than the winner account.

O'Brien engaged in a manipulative scheme in which he used the helper accounts to affect artificially the price of various stocks to the benefit of the winner accounts. In doing so, O'Brien acted with the intent to induce other market participants to fill orders at the artificially inflated or deflated prices.

According to the complaint, O'Brien executed over 18,000 coordinated trading events in eighteen accounts at fourteen different brokerage firms. For some of these events, O'Brien would start by placing several sell orders for a certain stock in the helper accounts. This would create the false appearance of sell interest in the stock, which would artificially decrease the stock's price. Then, O'Brien would acquire larger positions in the same stock in the winner accounts at the artificially deflated price. Once the winner accounts finished buying the stock, O'Brien often cancelled remaining open helper account sell orders.

For other coordinated trading events, O'Brien began by acquiring a position in a stock in the winner accounts. Then, he would place a series of smaller buy orders for the same stock in the helper accounts to artificially increase the stock price. O'Brien would then liquidate the winner account positions at the inflated price and cancel remaining open buy orders in the helper account.

O'Brien aimed to generate profits for the winner accounts that were greater than the losses in the helper accounts. Through his actions, O'Brien intended to induce market participants to sell to and purchase from the winner accounts at prices that were artificially impacted by the helper accounts.

O'Brien's most active period of coordinated trading events occurred between mid-September 2015 and December 2016. During this time, he engaged in 11,738 coordinated trading events using ten accounts at eight brokerage firms. About 75% of O'Brien's coordinated trading events during this time resulted in net profits. Even deducting the net-unprofitable coordinated trading events, O'Brien still obtained an overall net gain during this period.

O'Brien then reduced his coordinated trading, but he continued executing the events through at least October 2020. From January 2017 to October 2020, he engaged in over 6,300 coordinated trading events using at least nine accounts at seven brokerage firms. Roughly 74% of the events during this time were net profitable, and, even deducting the events that led to net losses, O'Brien still obtained an overall net gain during this period, as well.

B. O'Brien's Interactions with Brokerage Firms and the SEC

O'Brien attempted to hide his coordinated trading activity by executing the winner and helper trades in accounts held at different brokerage firms. Nonetheless, several of the firms O'Brien used for his scheme identified his activity as potentially manipulative trading and sent warnings to him that explained relevant concepts of prohibited manipulation. For example, in October 2 015, one firm identified an apparent "wash trade" by O'Brien and explained to him that manipulative trading practices involve any trades that have the purpose of "[c]reating or inducing a false, misleading, or artificial appearance of activity in the security" or "setting a price that does not reflect the true state of the market in the security." These kinds of warnings also informed O'Brien that manipulative trading practices are serious violations of exchange trading rules that could result in regulatory penalties.

In March 2016, a different firm contacted O'Brien about potential "layering" in his account. The firm explained to O'Brien that layering

involves the placement of multiple, non-bona fide, limit orders on one side of the market at various price levels ... to create the appearance of a change in the levels of supply and demand, thereby artificially moving the price. An order is then executed on the opposite side of the market at the artificially created price, and the non-bona fide orders are immediately canceled.

The firm stated that layering was a manipulative trading practice.

At least one firm also asked O'Brien directly whether he engaged in coordinated trading. Specifically, in March 2019, a representative of one firm emailed O'Brien as follows:

[T]rading activity in National General Hlgs (NGHC) on March 20, 20129 [sic] where your account appeared to submit multiple sell orders [in less than a minute] that appeared to contribute to the market quote narrowing from 24.31/24.77 to 24.26/24/34. In addition, we noted your account submitting buy orders over [a period of approximately 30 seconds] that appeared to contribute to the market quote moving from 24.11/24.53 to 24.36/24.49. Please provide a written explanation regarding your investment strategy and rational [sic] for order placement NGHC. Do you coordinate your trading with other accounts or individuals outside of [this firm]?

(Emphasis added.) Roughly three weeks later, O'Brien responded to the email generally, but did not answer whether he coordinated his trading. Thus, the firm representative responded, "Would you please confirm the below question? Do you coordinate your trading with other accounts or individuals outside of [this firm]?" To this, O'Brien responded misleadingly, "I don't coordinate with other individuals .... I mostly trade off of Upgrades or recommendations on CNBC." O'Brien did not mention that he was coordinating trades with other accounts he held at other firms.

The accounts that O'Brien used for coordinated trading events were often closed by brokerage firms. When this happened, O'Brien would open new accounts at other firms in his or his wife's name to continue the coordinated trading scheme. For example, in October 2015, a few weeks after sending O'Brien the warning described above regarding wash trades, the firm closed his account. After the account was closed, O'Brien increased his usage of a different account at a different firm. Then, in the following months, he opened new accounts at two other firms and used those accounts to continue his coordinated trading events.

O'Brien never disclosed his coordinated trading when brokerage firms asked about his trading activity. For example, one firm's compliance department asked the firm's branch manager to contact O'Brien to discuss his trading activity. The firm told the branch manager:

We' d like you to ask [O'Brien] how he chooses which stocks to trade; i.e., does he go by fundamental analysis, technical analysis, focus on specific sectors/industries, etc.? Also, please ask him if he is using a 3rd party service (aside from what the firm provides) such as a website or automated trading software. As I said on the phone, this is somewhat time sensitive. Hopefully, you are able to get in touch with him and will not have to resort to leaving a message, telling him his internet access will be set to View Only until he returns your call.

The branch manager later reported back saying that O'Brien had told him that he "[1]ooks primarily at momentum stuff, buys when it falls 30/40 cents, likes to try to catch a bounce. Likes to stay in the same stocks he knows. Says he doesn't use software. Trades the news'. Not actively scanning." In fact, however, 99% of the gains O'Brien earned in his accounts with that firm were attributable to coordinated trading. That is, rather than just "looking at momentum" and "trying to catch a bounce," O'Brien was creating the...