In many of the Commission’s enforcement actions, the losses from the fraudulent system are borne by the unsuspecting and inexperienced investor caught in a series of false statements – the typical fraud action. Seldom is the person with big loss of broker. Not so with the agency’s latest enforcement lawsuit. There the losses from an ineffective trading system went to the broker. SEC v Batra, Civil Claim No. 2: 21-cv-00434 (C. D. Cal., Filed January 15, 2021).
The Defendant Abhi Batra is a Los Angeles based trader. While he apparently acted frequently, he was often unsuccessful. The trading program he implemented over a four-year period from 2016 generally suffered losses. He had profits, however; The brokers took the losses.
Initially, Mr. Batra acted on his behalf through seven brokerage accounts. After the accounts were set up, he arranged for funding by transferring cash from his bank account through Automated Clearing House or ACH transfers. Usually he would trade options. If the trade lost money, it would cause his bank to withdraw funds from being sent to the broker by falsely claiming it was unauthorized. This left the brokerage firm with the loss on the trade.
For example, in February 2018, Defendant transferred $ 55,000 to Broker A. Mr. Batra then bought options on two different stocks. The trades were not profitable. The defendant then called his bank and falsely claimed that the ACH transfer had not been approved. When the transfer was withdrawn, the broker had losses of $ 54,000.
Mr. Batra used the same technique in some cases even when the trade was profitable. For example, Mr. Batra bought options on another stock from Broker B. The account was funded with another ACH transfer of cash. The trade was profitable. The defendant then withdrew the profits. He later also withdrew the ACH broadcast, again claiming it was fraudulent and unauthorized.
Using the approach outlined in the two examples above, Mr Batra bought $ 44 million in securities through 44 accounts with 14 different brokers between 2016 and early 2020.
When the brokers understood the scheme used by Mr. Batra – known as « freeriding » – the defendant changed his approach. By March 2018, he had switched to nominee accounts for his program that were not in his name. In less than two years he opened 32 more accounts. Approximately $ 900,000 USD was deposited into the accounts via ACH transfers. As a result, the transmissions were withdrawn due to false information provided by the defendant.
During the four year period, brokers suffered losses of $ 665,000 from defendant’s freeride program. The complaint alleges violations of Section 10 (b) of the Stock Exchange Act. The case is pending. See Ref. Rel. No. 25012 (January 19, 2021).
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