SEC pushes for default judgment against traders accused of running $31m stock manipulation scheme

Maria Nikolova

The regulator proposes that 15 traders, primarily based in China, are prohibited from engaging in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

The United States Securities and Exchange Commission (SEC) has filed a motion for default judgment against a number of traders accused of engaging in a large-scale stock manipulation scheme.

On Monday, August 31, 2020, the SEC submitted the proposed default judgments against Shuang Chen, Lirong Gao, Jing Guan, Tonghui Jia, Xuejie Jia, Lujun Sun, Huailong Wang, Jiadong Wang, Jiafeng Wang, Linlin Wu, Lin Xing, Yong Yang, Jiancheng Zhao, Wenwen Du, Honglei Shi, and Forrest (HK) Co., Limited. They are among the defendants allegedly involved in a scheme to manipulate more than 3,000 U.S.-listed securities for over $31 million in illicit profits.

The SEC alleges that the traders, who are primarily based in China, manipulated the prices of thousands of thinly traded securities by creating the false appearance of trading interest and activity in those stocks, thereby enabling them to reap illicit profits by artificially boosting or depressing stock prices.

For example, according to the SEC’s complaint, the traders used multiple accounts to place several small sell orders to drive down a stock’s price before using a different set of accounts to buy larger amounts of the stock at the artificially low prices. After accumulating their position, the traders then flipped the script and placed several small buy orders to push up prices so they could then sell their stock at artificially high prices.

According to the proposed default judgments submitted at the Massachusetts District Court on August 31, 2020, the defendants are permanently restrained and enjoined from violating, directly or indirectly, Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) [15 U.S.C. § 78j(b)] and Rule 10b-5 promulgated thereunder [17 C.F.R. § 240.10b-5], by using any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of any security:

  • (a) to employ any device, scheme, or artifice to defraud;
  • (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
  • (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

The defendants are also permanently restrained and enjoined from violating Section 9(a)(2) of the Exchange Act [15 U.S.C. § 78i(a)(2)] by, directly or indirectly, effecting, alone or with one or more other persons, a series of transactions in any security registered on a national securities exchange, any security not so registered, or in connection with any security-based swap or security-based swap agreement with respect to such security, creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.

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