Free Riding - S.E.C. Enforcement Actions

S.E.C. Enforcement Actions

Apart from credit rule violations inherent in free riding, the more significant and direct harm can come when the customer never pays or deposits to cover the trade, leaving the broker to hold the bag (if the trade was a success, the broker nets the trades, but if it was not, the customer should deposit the difference). The Securities and Exchange Commission has brought successful civil injunctive enforcement actions against free riders, with follow-on criminal prosecutions by the U.S. Attorney in New York, where significant prison sentences were imposed, for both credit and antifraud violations where it was clear that the customer never intended to cover the trade and was only using a succession of brokers to play the market, hoping for success, and causing serious losses to brokers. See SEC v. Schlomo Teitelbaum, SEC News Digest http://www.sec.gov/news/digest/1981/dig061181.pdf (civil injunctive action, injunction granted) and http://www.sec.gov/news/digest/1981/dig012381.pdf (criminal prosecution, concurrent 18 months sentence).