A Florida man who used an institutional technique to get a ‘’free ride’’ on trades has been sentenced to up to three years in prison in a court in New York, a day after getting a 33-year federal sentence.
Scott Kupersmith took part in a scheme known as “free-riding,” in which an individual trader buys or sells securities in a brokerage account without having the money or shares to pay for them, according to Manhattan District Attorney Cyrus Vance Jr. The Securities and Exchange Commission requires securities purchasers to have the assets, or at least the buying power, to complete purchases when orders are placed.
He and associates opened more than three dozen brokerage accounts from 2008 to 2010, using mail drops and “virtual offices” in the New York area as the addresses of a variety of shell companies, according to Vance.
Kupersmith asked that each account be opened as a “delivery-versus-payment,” or DVP, account, which allows clients to buy or sell securities with one firm and settle them with cash or securities from an account at another firm, according to the complaint.
Institutional Customers
Brokerage firms “generally” only allow institutional customers or individuals with high net worth to open DVP accounts.
Kupersmith “falsely represented” to the firms that he had a personal net worth of about $5 million and ran a hedge fund with a liquid net worth of about $10 million to $20 million, according to the complaint.
He bought about $64 million worth of securities, and made more than $1.2 million through the illegal trades, according to Vance’s office. The broker-dealers, which include Morgan Keegan & Co., William Blair & Co. and JPMorgan Securities LLC, lost more than $830,000, Vance said.
The sentence was handed down by New York State Supreme Court Justice Maxwell Wiley. Kupersmith pleaded guilty to grand larceny and fraud before him in May. Kupersmith, formerly of Alpine, New Jersey, was arrested in Florida in October 2011 after a joint investigation by the U.S. attorney’s office in New Jersey and the SEC, according to Vance.
His mother and one of his sisters were in court. He wore a yellow jumpsuit.
Kupersmith on Monday was sentenced to federal prison for the scheme as well, New Jersey U.S. Attorney Paul J. Fishman announced. Kupersmith had previously pleaded guilty before U.S. Magistrate Judge Patty Shwartz in Newark on federal charges.
Kupersmith, wearing a yellow prison jumpsuit, was ordered today to pay restitution in the state case of $650,000. His mother and one of his sisters were in court for his sentencing. His state and federal sentences will be served concurrently.
He was ordered to pay $1.8 million in restitution in the U.S. case.
‘Buyer’s Puff’
Kupersmith’s lawyer, Leonard Levenson, said outside court that his client admitted crossing “the line between ’buyer’s puff’ and fraud” when he gave “specific false statements” to investors. He’s been in prison in Essex County jail in New Jersey for 17 months and probably won’t serve a total of more than two years, Levenson said.
Free-riders typically cover their purchases by buying shares of the same security on the same day through another firm, and attempt to profit from short-term price changes without putting personal assets at risk, Vance’s office said.
Kupersmith, 47, used borrowed or assumed identities to create shell companies and then used those companies to open accounts at offshore banks cleared through a “reputable U.S. financial institution,” according to the prosecutor. Kupersmith misappropriated the personal information of a family member and friend and used it to open trading accounts, according to a complaint filed by federal prosecutors in Newark, New Jersey.
Kupersmith traded securities including shares of Baidu Inc., the owner of China’s dominant search engine, and CME Group Inc., the parent company of the New York Mercantile Exchange, according to federal prosecutors.
Kupersmith also solicited investors for a hedge fund he claimed to control, telling them it had an annual return of about 30 percent and that he had personally made more than $1 million in the past year, prosecutors said.
He told investors their principal was guaranteed, and told at least one potential investor that he would get a return of about 43 percent every three months.
Kupersmith raised about $500,000 for the non-existent hedge fund, which he used to pay for flights, limos, luxury hotel rooms and visits to adult entertainment clubs, as well as to fund the investment scheme and pay other investors, prosecutors said.
