A Canadian man who allegedly told an undercover FBI informant he was conducting a lucrative high-frequency stock trading scheme has been arrested in Florida and charged with manipulating share prices on U.S. stock exchanges.
Aleksandr Milrud, described as a resident of both Thornhill, Ont., and Aventura, Fla., was arrested at his Florida home on Tuesday morning and charged with conspiracy to commit securities fraud and wire fraud. The wire fraud charge carries a maximum penalty of 20 years in prison.
A statement from the U.S. Department of Justice alleged Mr. Milrud orchestrated "a large-scale, international stock market manipulation scheme" using accomplices he recruited in China and South Korea.
"The defendant and his far-flung network of conspirators operated an international scheme in which they generated millions of dollars in illicit profits for themselves with artificial trade orders executed at high speed," Paul Fishman, U.S. Attorney for the district of New Jersey, said in the statement.
The Department of Justice alleged Mr. Milrud employed a trading strategy known as layering or spoofing, in which a trader and his accomplices enter dozens of orders within a matter of seconds to buy or sell a stock, giving the appearance of market activity that changes the price of the shares.
The accomplices quickly withdraw the orders before they are executed, but in the meantime, a trader executes a smaller number of lucrative real trades to take advantage of the shifting share price.
Mr. Fishman said in the statement the case demonstrates that manipulations causing even small price changes in a stock "can yield large gains when done on a massive scale."
The charges against Mr. Milrud are the first federal prosecution of a case involving layering. FBI special agent Aaron Ford, who worked on the case, said the FBI will continue to look for other layering frauds that might affect market trading.
"The loss to investors due to this innovative fraud could be in the millions," he said in a statement.
The Justice Department's complaint against Mr. Milrud, which was unsealed Tuesday, does not say how much money he allegedly earned from the manipulative trading, but says he was recorded telling a would-be accomplice that he earned anywhere from $1-million to $50-million per month from the trading.
The complaint said Mr. Milrud's scheme was detected after he approached an official at an offshore bank to recruit him into participating in the scheme, not knowing the man was working with law enforcement officials.
The complaint alleges he was recorded telling the man that he employed numerous strategies to ensure none of the trading could be traced to him, adding his accomplices used different computers from different Internet protocol addresses so it wouldn't look like the same people were entering trade orders.
He allegedly told the informant he controlled 60 per cent of all Chinese-based traders engaged in layering, and he had worked with a software company to develop special keyboard shortcuts to place and cancel multiple trading orders quickly with few keystrokes.
He also logged onto the man's computer to show him how the trading worked, not knowing it was a laptop provided by the FBI that had software on it to record all activity and key strokes, the complaint said.
The complaint alleges Mr. Milrud was recorded telling the man his trading would look "100 per cent kosher" to an outside observer.
"If I didn't tell you what I just told you, it would seem like regular trading – you would not know nothing of what I do," he allegedly stated.
Also Tuesday, the U.S. Securities and Exchange Commission said it has charged Mr. Milrud with aiding and abetting in violations of anti-fraud laws.