Virginia "Free-Riding" Stock Schemer Sentenced for Multi-Million Dollar Fraud
The U.S. Attorney's Office for the Northern District of Ohio announced last week the sentencing of Vriginia resident Sean M. Daly to 41 months imprisonment after Daly pled guilty to one count of securities fraud. The government alleged that, from 2001 through 2007, Daly engaged in a "free-riding" scheme to purchase stocks. "Free-riding" occurs where a purchaser of stocks places an order for stocks but has insufficient funds to cover the purchase price and instead uses the proceeds from the sale of the stock to cover the purchase. Free-riding schemes attempt to profit from short term changes in prices.
Daly ordered millions worth of securities through the accounts, using the names of nonexistent clients or corporations. He would monitor the price of the stocks during a three-day waiting period, and would refuse delivery of any stocks which had decreased in value, falsely claiming that he was waiting on an overseas client to make payment. Daly also issued false press releases and financial analyses to promote certain stocks which he had placed orders for in order to artificially increase their prices.
The scheme involved accounts with seven broker-dealers: KeyBanc Capital Markets, Inc.(f.k.a. McDonald Investments, Inc.), Dain Rauscher, Inc. (n.k.a. RBC Dain Rauscher, Inc.), Ryan Beck & Co., Inc. (n.k.a. Stifel Nicolaus & Co.), Jesup & Lamont Securities Corp., Jeffries & Company, Inc., Raymond James & Associates, Inc., and Robert W. Baird & Co. Daly also used trading accounts in various company names at National Financial Services, Goldman Sachs Execution & Clearing, LP, Charles Schwab, and Lloyds of London Market Services.
Daly's scheme was discovered after he was unable to pay for 250,000 shares of stock in Decker Outdoor Corporation which he purchased through McDonald Investments, Inc., causing a loss to McDonald of $1,013,272.56 when it was forced to liquidate the stock.
The Court ordered Daly to pay $5.7 million in restitution.
