Securities v. Lek Securities Corp.
276 F. Supp. 3d 49
| S.D.N.Y. | 2017Background
- Lek Securities (Lek) and its CEO/compliance officer Samuel Lek provided U.S. market access to foreign day‑trader Avalon and handled the Avalon Account; Avalon, its principal Nathan Fayyer, and trader Sergey Pustelnik are co‑defendants.
- The SEC alleges two primary manipulation schemes run through the Avalon Account: (1) extensive layering/spoofing—placing non‑bona fide orders to create false supply/demand and then executing opposing bona fide orders; and (2) cross‑market manipulation—trading stock at a loss to move underlying option prices and profit in options.
- Avalon’s layering and cross‑market activity allegedly produced >$28 million in profits; Lek earned substantial commissions and routed Avalon’s orders.
- Regulators (FINRA, exchanges, NYSE) repeatedly notified Lek from 2012–2016 that Avalon’s trading looked like layering and cross‑market manipulation; Lek implemented but then relaxed a proprietary control (Q6) for Avalon and upgraded options technology at Avalon’s request.
- SEC sued (March 2017) and obtained an ex parte TRO and preliminary injunction against Avalon; Lek moved to dismiss the SEC’s complaint (June 2017).
- The district court denied Lek’s motion to dismiss, holding the SEC adequately pleaded aiding‑and‑abetting and direct liability under multiple statutes and that the factual and scienter disputes are for trial.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Avalon’s layering and cross‑market trading can constitute market manipulation under §10(b)/Rule 10b‑5 | SEC: layering/spoofing and coordinated cross‑market trades injected false pricing signals and deceived the market | Lek: non‑bona fide orders were live, executable orders and trading involved real counterparties; thus not manipulative as a matter of law | Court: Allegations plausibly plead manipulation (intent and false pricing signals); question of intent/facts for trial |
| Whether SEC alleged aiding‑and‑abetting liability by Lek under §20(e) (for §10(b) violations) | SEC: Lek had knowledge (regulatory warnings, internal emails) and provided substantial assistance (relaxed controls, tech upgrades, routing) | Lek: provided routine brokerage services and implemented Q6 control; regulatory notices insufficient to show scienter | Court: Complaint pleads knowledge and substantial assistance with particularity; survives dismissal |
| Whether SEC alleged aiding‑and‑abetting liability under §15(b) for violations of §17(a) (Securities Act) | SEC: similar theory as §20(e) — knowledge and substantial assistance in offer/sale context | Lek: same defenses as to §20(e) (routine services, lack of scienter) | Court: Pleading standard met; claim survives dismissal |
| Whether cancelled orders can satisfy §9(a)(2) "series of transactions" requirement | SEC: §9(a)(2) covers bids/orders (not only executions) that create apparent active trading; layering involves orders and cancellations | Lek: Cancelled orders are not "transactions" and thus not a §9(a)(2) violation | Court: Courts/regulators treat orders/bids as within §9(a)(2); SEC pleaded primary violation and aiding‑and‑abetting under §20(e) adequately |
Key Cases Cited
- Loginovskaya v. Batratchenko, 764 F.3d 266 (2d Cir.) (Rule 12(b)(6) pleading standards and inferences)
- Keiler v. Harlequin Enters. Ltd., 751 F.3d 64 (2d Cir.) (facial plausibility standard)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir.) (market‑manipulation pleading requirements under Rule 9(b))
- Wilson v. Merrill Lynch & Co., Inc., 671 F.3d 120 (2d Cir.) (manipulation as deception that injects false pricing signals)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (U.S.) (scienter requirement for §10(b))
- Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (U.S.) (securities laws’ disclosure purpose)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S.) (disclosure and investor reliance principles)
- Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787 (2d Cir.) (§9(a)(2) requires manipulative motive/willfulness)
- SEC v. Apuzzo, 689 F.3d 204 (2d Cir.) (elements of aiding‑and‑abetting under §20(e))
- Koch v. SEC, 793 F.3d 147 (3d Cir.) (intent, not success, required for manipulation)