Trader in "free-riding" fraud case admits guilt

Reuters News
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Posted: May 09, 2012 12:29 AM
Trader in "free-riding" fraud case admits guilt

By Jonathan Stempel

(Reuters) - A Florida man accused of operating a "free-riding" fraud, in which he bought and sold $64 million of stock with money he did not have, has pleaded guilty in New York to 10 criminal counts, the office of Manhattan District Attorney Cyrus Vance said on Tuesday.

Scott Kupersmith admitted to grand larceny, securities fraud and scheming to defraud before state Supreme Court Justice Maxwell Wiley in Manhattan on Monday.

The plea is separate from a related criminal case filed in October by U.S. Attorney Paul Fishman in New Jersey, and a civil fraud case filed by the U.S. Securities and Exchange Commission. Kupersmith has yet to resolve those cases.

Leonard Levenson, a lawyer for Kupersmith in the New York criminal case, declined to comment. A federal public defender handling the New Jersey criminal case did not immediately return a call seeking comment.

In a typical free-riding scheme, a trader sells shares in one brokerage account and covers that trade by buying the same shares in an account at a different brokerage.

This can be a way to profit from short-term price fluctuations without placing personal assets at risk. It can also saddle brokerages with losses on bad trades.

According to his prepared allocution, Kupersmith conducted "paired trades" more than 200 times, at more than 36 brokers, using accounts that named bogus shell companies and hedge funds.

He said this let him buy publicly traded securities between July 2009 and September 2010 despite lacking sufficient funds.

"In effect, this was a risk-free Ponzi-style settlement scheme that allowed me to walk away with more than $1.2 million through this illegal trading," Kupersmith said.

Among the brokerages that Kupersmith stole from were Barclays Capital, Lazard Capital Markets and Morgan Keegan & Co, according to the prepared allocution.

Kupersmith lived in Boca Raton, Florida at the time of his arrest and used to live in New Jersey.

Fishman has said Kupersmith induced brokerages to open accounts by misrepresenting his net worth and his alleged control of a $20 million Manhattan hedge fund.

He also said Kupersmith raised money by falsely telling investors to expect high returns, only to use the bulk of the funds to repay earlier investors, or on personal expenses such as limousines, luxury hotel rooms and adult entertainment clubs.

Among the companies in which Kupersmith traded were Baidu Inc, CME Group Inc Netflix Inc and Priceline.com Inc, according to the SEC.

The New York case is New York v. Kupersmith, New York State Supreme Court, New York County, No. 04360-2011. The federal cases are U.S. v. Kupersmith, U.S. District Court, District of New Jersey, No. 11-mag-03750, and SEC v. Kupersmith et al in the same court, No. 11-06277.

(Reporting By Jonathan Stempel in New York)