The Securities and Exchange Commission recently announced a formal action against a number of individual parties and Archegos Capital Management as part of a multi-billion dollar market manipulation action. The SEC is seeking to enjoin the parties from further violations of Section 17(a) of the Exchange Act as well as SEC Rule 10b-5. The SEC is further seeking disgorgement of illegal profits and civil monetary penalties. The alleged manipulation identified in the SEC’s complaint covered three distinct behaviors: manipulating the open, ramping/momentum ignition and marking the close. The goal was to artificially inflate the share prices for the top 10 holdings of Archegos.
The SEC alleged that Archegos engaged in a series of transactions prior to market open with manipulative intent and for the purpose of pushing the share prices of certain issuers, in which Archegos held long exposures, upward. The goal was to induce other traders, such as short sellers or other market participants, to notice the active trading in and upward price movement of the share prices of certain issuers and, as a result, purchase those issuers’ securities during the day. Archegos also traded throughout the day in a manner that served to increase the share prices of certain issuers. In certain instances, when trading security based swaps (“SBSs”), traders would enter limit order instructions and incrementally increase the limit throughout the trading day as SBS orders were filled, both in an attempt to increase the stock price and to induce others to purchase the stock. Archegos also engaged in substantial trading during the last 30 minutes of the trading day attempting to “mark the close” or push the stock prices of certain issuers, in which Archegos held long exposures, upward. In one example, for a two month period, Archegos traded one issue during the last 30 minutes over a majority of trading days, including 34 days when orders exceeded the equivalent of over 100,000 shares (with dollars exceeding $2 million on all of those days), 15 days when orders exceeded the equivalent of over 500,000 shares (with dollars exceeding $12 million on all of those days), and five days when orders exceeded the equivalent of over 1,000,000 shares (with dollars exceeding $30 million on all of those days), including a high of over 1.76 million shares.
The manipulative activities described above along with the size of Archegos’ exposures to certain securities allowed Archegos to assert a dominant market position over the securities of these issuers. Archegos’s cumulative cash equity and derivative SBS exposures to certain issuers equated to percentages between 30-70% of outstanding shares based on Archegos’ estimate of those issuers’ floats. Archegos could thus impact markets through the exercise of its sheer buying power.
VIP: For any registered broker-dealer, there are critical implications for not having a reasonably designed monitoring system to identify the types of activity noted above. A lack of or inadequate monitoring for such behavior could subject the firm to potential violations of FINRA Rule 3110 for failing to have an appropriate supervisory system or FINRA Rule 2010 for failing to observe high standards of commercial honor and just and equitable principles of trade. Validus offers procedures to detect many types of potentially violative behavior, including pre-market manipulation, momentum ignition and marking the close, which are referenced above. Additionally, Validus provides risk checks to identify concentrated positions and large orders. Identifying manipulative activity can sometimes be a moving target as bad actors consistently come up with new methods. Therefore, it is crucial to proactively monitor and identify indicative behaviors by casting a wide net for such activity and working closely with your surveillance provider to stay ahead of the curve.
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