The SEC has charged two South Floridians, posing as money managers, with an illegal scheme of selling shares of stock before the shares had been paid for. According to allegations filed in federal court in New Jersey, the SEC has charged Scott Kupersmith of Boca Raton and Frederick Chelly of Miami Beach of opening accounts with broker-dealers, on behalf of several purported “investment funds,” and ultimately causing millions in losses.
Kupersmith and Chelly would open “Delivery Versus Payment/Receipt Versus Payment” (“DVP”) brokerage accounts in the name of their purported investment funds. Chelly opened a DVP in the name of Antibe Arbitrage Group, Inc., while Kupersmith opened DVP’s in the name of Atlantic Southern Capital Group, Fullerton Capital Group, Inc., and Northbrea Capital Group, Inc. Kupersmith and Chelly opened these accounts by convincing broker-dealers that they held sufficient cash and securities with a third-party bank to cover their trades. Of course, Kupersmith and Chelly held no such funds or assets to cover their trades.
Then, the two would engage in illegal “free-riding,” where they would buy and sell the same quantity of the same stock in different accounts with the intent of profiting from swings in the price of the stock. In most instances, Kupersmith and Chelly used the proceeds from their stock trades to purchase the same shares over again. When their trades were profitable, Kupersmith and Chelly kept the profits. When the trades resulted in loss, however, Kupersmith and Chelly did not cover the sales they had ordered and left the broker-dealers to settle the trades at a significant loss.
The scheme fell apart when Kupersmith and Chelly started failing to deliver the shares necessary to settle sales in their various DVP’s. This forced broker-dealers to purchase replacement shares to cover the sales transaction. Because the broker-dealers had to purchase replacement shares at higher prices than those at which the shares were sold, the broker-dealers suffered losses equivalent to the difference between the replacement purchase price and the proceeds from the sale.
By the end, Kupersmith and Chelly had caused over $2 million in losses to broker-dealers. The two men reaped over $600,000 in illicit profits. The SEC has charged both men with violations of section 17(a) of the Securities Act and section 10(b) of the Exchange Act, seeking an injunction against further violations, disgorgement of “ill-gotten gains,” and civil penalties. Kupersmith also faces charges in New York, including first and second-degree grand larceny, scheming to defraud, and violating New York’s General Business Law.