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UNITED STATES OF AMERICA
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In the Matter of
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ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, IMPOSING REMEDIAL SANCTIONS AND CEASE-AND- DESIST ORDER |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether Joseph Ronald Blackwell, Bradford Dylan Blackwell, and Timothy Ryan Blackwell ("Respondents") violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and to determine the appropriateness of disgorgement.1
II.
In anticipation of the institution of these administrative proceedings, Respondents have each submitted Offers of Settlement ("Offers") that the Commission has determined to accept. Solely for the purposes of this proceeding and any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, and prior to a hearing and without admitting or denying the findings set forth herein, except as to jurisdiction over them and over the subject matter of this proceeding, which Respondents admit, Respondents consent to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, Imposing Remedial Sanctions and Cease-and-Desist Order ("Order"). The Commission has determined that it is appropriate to accept the Respondents' Offers and accordingly is issuing this Order.
III.
FACTS
Based on the foregoing, the Commission finds that:
A. Respondents
Joseph Ronald Blackwell, age 52, is a computer programmer who resides in Morgan Hill, California. Bradford Dylan Blackwell and Timothy Ryan Blackwell are his children;
Bradford Dylan Blackwell, age 28, is a computer programmer who resides in San Jose, California;
Timothy Ryan Blackwell, age 26, is a computer programmer who resides in Troy, Michigan
B. The Blackwell's Manipulation of the National Best Bid or Offer (NBBO)
The Limit Order Display Rule, Rule 11Ac1-4 under the Exchange Act (the "Display Rule"), requires a Nasdaq market maker, subject to certain specified exceptions, to display in the market maker's public quote a customer limit order that (i) is priced better than the market maker's quote, or (ii) represents more than a de minimis increase to the size of the market maker's quote, if the market maker's quote is at the NBBO at the time the customer's limit order is received. The Display Rule provides greater transparency by allowing the market to see improving customer limit orders and, consequently, enhances liquidity and execution opportunities for customer orders.
During January 2000, Joseph Blackwell placed at least twenty-two (22) buy and sell limit orders to artificially affect the NBBO of a Nasdaq listed security. Joseph Blackwell affected the NBBO for this security by first placing an order with an electronic communications network ("ECN"). This order became the new best bid or offer. Within seconds, Joseph Blackwell or his sons placed one or more much larger orders through multiple accounts on the opposite side of the market. These orders were filled by brokers who guaranteed execution of the security at the new NBBO up to a maximum number of shares, regardless of the size of the NBBO quote. To facilitate the scheme, Joseph Blackwell sent flash-mail messages to his sons alerting them to the exact moment that he manipulated the NBBO.
After moving the bid or offer quote to the desired price, and obtaining an execution, Joseph Blackwell would either cancel his initial market moving order or allow it to be filled. In this manner, Joseph Blackwell manipulated the public quote to obtain better execution prices for his and his sons' trades.
The Respondents' conduct, known in the industry as "spoofing," is illustrated by the following example:
While Respondents were all on-line, Joseph Blackwell sent an instant message to Timothy Blackwell and Bradford Blackwell alerting them of his intention to move the NBBO of the target security. Then the following trading occurred:
10:25:19 - Joseph Blackwell placed an order to buy 100 shares of the target security at $9.1875, and directed that it be routed to an ECN. The order raised the NBBO bid price from $9 to $9.1875;
10:25:42 - Joseph Blackwell entered a limit order to sell 500 shares of the target security at a price of $9.1875 and the order was immediately executed;
10:25:44 - Timothy Blackwell entered a limit order to sell 500 shares of the target security at a price of $9.1875 and the order was immediately executed;
10:25:47 - Bradford Blackwell entered a limit order to sell 500 shares of the target security at a price of $9.1875 and the order was immediately executed;
Respondents were advantaged $281.25 by selling 1500 of the target security at the manipulated bid of $9.1875 instead of at $9.
IV.
LEGAL ANALYSIS
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, prohibit the use of "any manipulative or deceptive device or contrivance in connection with the purchase or sale of any security." Section 17(a) of the Securities Act prohibits such conduct in the offer or sale of any security. These antifraud provisions prohibit trading designed to artificially affect the market price of a security. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 198 (1976). Indeed, the Commission has consistently held that Section 10(b) and Rule 10b-5 prohibit trades made for the purpose of manipulating stock prices because their effect "is to distort the character of the market as a reflection of the combined judgments of buyers and sellers." Halsey, Stuart & Co., SEC Release No. 34-4310 (1949). "In essence, a manipulation is the intentional interference with the free forces of supply and demand." In the Matter of Pagel, Inc., et al., SEC Release No. 34-22280 (1985); Accord United States v. Stein, 456 F.2d 844, 850 (2d Cir. 1972).
Respondents repeatedly engaged in a pattern of conduct that affected the NBBO and permitted the execution of orders at prices that would not otherwise have been available in the market. Respondents' actions interfered with the free forces of supply and demand and undermined the integrity of the NBBO. In the Matter of Ian Fishman and Lawrence Fishman, SEC Release No. 34-40115 (1998); In the Matter of Robert J. Monski, SEC Release No. 34-44250 (2001). Accordingly, Respondents violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
V.
FINDINGS
Based on the foregoing, the Commission finds that Respondents violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
VI.
ORDER
Accordingly, IT IS HEREBY ORDERED that Respondents:
A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and
Rule 10b-5 thereunder;
B. Shall be held jointly and severally liable to pay disgorgement and prejudgment interest totaling $3,212.67, payable within ten (10) days of the entry of this Order by U.S. Postal money order, certified check, bank cashier's check, or bank money order, made payable to the Securities and Exchange Commission and shall transmit the payment by certified mail (return receipt requested) to the Office of the Comptroller, U.S. Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312, under cover of a letter that identifies the respondents and the name and file number of this proceeding (HO-9086). A copy of the cover letter and of the form of payment shall be simultaneously transmitted to Scott W. Friestad, Assistant Director, Division of Enforcement, U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0708.
By the Commission.
Jonathan G. Katz
Secretary
| 1 | This matter is related to SEC v. Joseph Ronald Blackwell, Bradford Dylan Blackwell, and Timothy Ryan Blackwell, Case Number 1:01CV02297 (D.D.C.)( Nov. 5, 2001) (ordering a $10,000 penalty by consent). |
http://www.sec.gov/litigation/admin/33-8030.htm
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