(HedgeCo.Net) The Securities and Exchange Commission has charged six individuals, including a federal inmate, for conducting a freeriding scheme that defrauded multiple broker-dealers.
The SEC’s complaint alleges that from May 2019 to early January 2021, Syed Arham Arbab, 25, and five others made more than $2 million in bogus deposits from empty or underfunded bank accounts into various brokerage accounts to deceive broker-dealers into providing instant deposit credit for online securities trading. The complaint alleges that Arbab and his fellow participants, which included his high school and college friends and a relative, received more than $1.5 million in instant deposit credit that they used to make unfunded online trades, which caused affected broker-dealers to lose at least $146,660. The complaint alleges that, in some instances, Arbab’s co-defendants gave Arbab their brokerage account log-in credentials so that he could personally engage in freeriding using their accounts, while, in other instances, Arbab coached such individuals in real time through text messages about how to freeride using their own accounts. Arbab allegedly conducted this scheme just before starting his prison sentence for another securities related scheme. The SEC previously charged Arbab in 2019 for running a Ponzi scheme from his fraternity house near the University of Georgia campus—for which he began serving a five-year sentence in January 2021, after he pleaded guilty in a parallel criminal case by the U.S. Attorney’s Office for the Middle District of Georgia.
“Securities traders who seek to cheat the market with fake deposits of money to make unfunded securities transactions will be held accountable for their deception,” said Justin C. Jeffries, Associate Director of Enforcement for the SEC’s Atlanta Regional Office. “Freeriding is not a victimless scheme, as broker-dealers form an integral part of the market and are protected from fraud under the federal securities laws.”
The SEC’s complaint, filed in federal district court in Atlanta, charges Arbab and his five co-defendants—Tomas Javier Jimenez, 24, of Dunwoody, Georgia; Blake Douglas McKinney, 26, of Plymouth, Michigan; Mushfiqur Rahman, 21, of Jamaica, New York; John Ryan Shows, 25, of Atlanta, Georgia; and William Carl Spagnoli, 24, of Alpharetta, Georgia—with violating certain anti-fraud provisions of the federal securities laws, and seeks permanent injunctive relief, conduct-based injunctions, and civil penalties from all six defendants, as well as disgorgement of ill-gotten gains and prejudgment interest from Arbab, Jimenez, Rahman, Shows, and Spagnoli.
Without admitting or denying the allegations, Jimenez, McKinney, and Shows have each consented to judgments, which, subject to court approval, would permanently enjoin them from violating the charged provisions, impose injunctions on future brokerage activities, and impose civil penalties. Jimenez and Shows each also consented to pay disgorgement and pre-judgment interest for their ill-gotten gains.