The Securities and Exchange Commission (SEC) charged Eduardo Hernandez, Christopher Flagg, Daquan Lloyd and Corey Ortiz, all currently or formerly of Long Island, New York, with fraud for perpetrating a multi-year free-riding scheme ” that generated more than $2 million in ill-gotten gains.
The SEC alleged that, from approximately November 2018 to January 2022, the defendants engaged in a free scheme, which is when a brokerage client buys and sells securities without having the funds to pay for the trade.
According to the complaint, the defendants opened and used unfunded or losing brokerage accounts to generate trading profits by engaging in matched trades with winning brokerage accounts they also controlled.
The complaint alleged that the defendants maintained the losing accounts with a broker that provided direct deposit credit, which they used to fund the trading of the losing accounts with the winning accounts at falsified prices using thinly traded options.
The complaint also alleged that by doing so, the defendants effectively transferred credit provided by the broker from the losing accounts to the winning accounts, accumulating guaranteed profits at the expense of the broker. In total, during the relevant period, the defendants allegedly used at least 600 brokerage accounts to repeatedly carry out the fraudulent scheme.
The SEC’s complaint, filed in the U.S. District Court for the Eastern District of New York, accuses Hernandez and Flagg of violating the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and of Rules 10b-5(a) and (c) thereunder and further violating those provisions by acting through or through another person in violation of Section 20(b) of the Exchange Act; and charging Ortiz and Lloyd with aiding and abetting the violations of Exchange Act Section 10(b) and Rules 10(b)(5) (a) and (c) by Hernandez and Flagg.
The SEC is seeking permanent injunctive relief, conduct-based injunctions, disgorgement with prejudice and civil penalties.