The Securities and Exchange Commission (SEC) has charged six individuals, including a federal inmate, for conducting a freeriding scheme, where an investor buys and sells a security before paying for it, which defrauded multiple broker-dealers.
The SEC’s complaint states that Syed Arham Arbab, 25, and five other individuals made more than $2m in false deposits from empty or underfunded bank accounts into various brokerage accounts to deceive broker-dealers into providing instant deposit credit for online securities trading.
“Freeriding is not a victimless scheme, as broker-dealers form an integral part of the market and are protected from fraud under the federal securities laws.”
Justin C Jeffries, Associate Director of Enforcement, SEC Atlanta office
The scheme was conducted between May 2019 and early January 2021 and included Arbab’s high school and college friends and one relative. During that period, the participants are alleged to have received more than $1.5m in instant deposit credit that they used to make unfunded online trades, which caused affected broker-dealers to lose at least $146,660.
Coached freeriding
The complaint also asserts that Arbab’s co-defendants gave Arbab their brokerage account log-in credentials, by which he personally could engage in freeriding using their accounts. Arbab is also said to have coached them in real time through text messages on how to freeride themselves. This scheme was allegedly conducted just before Arbab started a five-year prison sentence for running a Ponzi scheme from his fraternity house near the University of Georgia campus, after he pleaded guilty in a parallel criminal case by the US Attorney’s Office for the Middle District of Georgia.
“Securities traders who seek to cheat the market with fake deposits of money to make unfunded securities transactions will be held accountable for their deception,” said Justin C Jeffries, Associate Director of Enforcement for the SEC’s Atlanta Regional Office.
“Freeriding is not a victimless scheme, as broker-dealers form an integral part of the market and are protected from fraud under the federal securities laws.”
Violating anti-fraud provisions
The SEC’s complaint was filed in federal district court in Atlanta, and charges Arbab and his five co-defendants Tomas Javier Jimenez, 24, of Dunwoody, Georgia; Blake Douglas McKinney, 26, of Plymouth, Michigan; Mushfiqur Rahman, 21, of Jamaica, New York; John Ryan Shows, 25, of Atlanta, Georgia; and William Carl Spagnoli, 24, of Alpharetta, Georgia, with violating certain anti-fraud provisions of the federal securities laws, and seeks permanent injunctive relief, conduct-based injunctions, and civil penalties from all six defendants, as well as disgorgement of ill-gotten gains and prejudgment interest from Arbab, Jimenez, Rahman, Shows, and Spagnoli.
Without admitting or denying SEC’s allegations, Jimenez, McKinney, and Shows have each consented to judgments, which, subject to court approval, would permanently enjoin them from violating the charged provisions, impose injunctions on future brokerage activities, and impose civil penalties. Jimenez and Shows have also consented to pay disgorgement and pre-judgment interest for their improper gains.
