Boise man accused of enabling fraudulent stock trades

Who’s charged

The electronic trading firms and individuals named in the SEC’s administrative proceedings are:

• Alchemy Ventures Inc. of San Mateo, Calif.; Mark H. Rogers, the firm’s president, who lives in San Carlos, Calif.; Steven D. Hotovec, the firm’s vice president, who lives in Redwood City, Calif.

• KM Capital Management LLC of Philadelphia; Joshua A. Klein, the firm’s founder and co-owner, who lives in Philadelphia.; Yisroel M. Wachs, the firm’s co-owner, who lives in Philadelphia.

• Zanshin Enterprises LLC of Boise; Frank K. McDonald, managing member of the firm, who lives in Boise; Richard V. Rizzo, an associate of the firm, who lives in Oceanside, N.Y.

• Mercury Capital of La Jolla, Calif.; Lisa R. Hyatt, the firm’s president, who lives in Escondido, Calif.; Douglas G. Frederick, an associate of the firm, who lives in Brighton, Mich.

Editor's note: The headline on an earlier version of this story incorrectly characterized the SEC's accusations against the Boise man, Frank K. McDonald. This is a corrected version.

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The U.S. Securities and Exchange Commission named Frank K. McDonald of Boise in a lawsuit that accuses McDonald’s defunct trading firm, Zanshin Enterprises, and others of letting a Latvian trader use their electronic stock-trading platforms to reap $850,000 in illegal profits. SEC documents implicate Zanshin Enterprises in nine trades that made more than $55,000 illegally.

“These firms provided unfettered access to trade in the U.S. securities markets on an essentially anonymous basis,” said Daniel M. Hawke, chief of the SEC’s Market Abuse Unit. “By failing to register as brokers, the firms and principals in this case exposed U.S. markets to real harm by evading crucial safeguards of the federal securities laws.”

The SEC complaint did not say how much, or even whether, McDonald and Zanshin profited. That information might emerge later, as the agency has launched separate administrative proceedings against Zanshin and three other electronic trading firms outside of Idaho. And it has started proceedings against McDonald and seven executives, all charged with enabling the Latvian trader’s scheme by allowing him anonymous and unfiltered access to the U.S. markets.

The Statesman could not locate McDonald for comment Thursday. Zanshin ceased operation in February 2010, according to the SEC. The agency said about 125 people traded as many as 4 million shares per month through the firm.

HOW THE SCHEME WORKED

Here’s what the SEC says:

Igors Nagaicevs of Jurmala, Latvia, broke into customer accounts at large U.S. broker-dealers and used them to artificially raise or lower share prices of more than 100 securities. He made more than 150 unauthorized purchases or sales in those accounts from June 2009 to August 2010.

Using direct, anonymous market access through Zanshin and other unregistered firms, Nagaicevs bought and borrowed shares of small- and medium-sized companies, such as Sterling Bancorp, Franklin Covey Co. and Build-A-Bear Workshop Inc.

He used his purchases to drive up the prices of stocks he owned so he could sell them at a profit, or to drive down the prices of stocks he borrowed so he could repay the stock loans with cheaper stock, pocketing the difference.

The pattern was completed in one day with trades taking only 15 to 20 minutes each. The trades sometimes made up more than 50 percent of the companies’ trading volume on those days.

The trades caused more than $2 million in damages to brokerage customers in the United States.

“Nagaicevs engaged in a brazen and systematic securities fraud, repeatedly raiding brokerage accounts and causing massive damages to innocent investors and their brokerage firms,” said Marc A. Fagel, director of the SEC’s San Francisco regional office, whose jurisdiction includes Idaho.

WHAT’S NEXT

The SEC lawsuit alleges that Nagaicevs violated the antifraud provisions of the federal securities laws and seeks injunctive relief, disgorgement with interest and financial penalties.

The SEC said its separate administrative action will determine:

Æ Whether Zanshin and McDonald did actually violate the broker registration requirement, as the agency alleges.

Æ Whether he aided and abetted and caused the firms’ violations.

Æ What sanctions, if any, are appropriate.

The Idaho Department of Finance, which regulates brokers and brokerages in Idaho, said McDonald was not registered in the state. The department will look into McDonald and Zanshin based on the SEC complaint, a spokesman said.

Sandra Forester: 377-6464