The Securities and Exchange Commission has charged two Wall Street insiders with the illegal ‘parking’ of investment securities.
In a press release issued on February 4, 2014, the US Securities and Exchange Commission (SEC) has declared charges against stock traders Thomas Gonnella and Ryan King, accusing them of a fraudulent scheme known as ‘parking.’
By definition, parking is a clandestine activity in which stock shares are hidden with another person or organization in order to conceal their true ownership. This is typically done in order to evade financial penalties for keeping aging investment securities in a trader’s inventory. (Parking is also sometimes employed by unscrupulous investors who wish to avoid registering information with the SEC upon acquiring 5% or more of the stock in a publicly-traded entity. In the past, it has also been used by corporate raiders desiring to conceal their intentions to purchase a large stake in a target company.)
In this case, the SEC alleges Gonnella hid securities with King’s firm to temporarily remove them from his books. This would allow him to circumvent a company-imposed penalty for the long-term holding of investments, and thus to collect a greater bonus at year’s end.
According to the SEC Enforcement Division allegation, Gonnella approached King and requested that his firm buy stocks that Gonnella would later repurchase. This would reset the holding period for the securities upon their return. The SEC calculated the eventual loss to Gonnella’s firm from this fraudulent exchange at roughly $174,000.
Gonnella and King allegedly concealed their activities from their employers by engaging an inter-dealer broker (IDB), a financial intermediary that conducts transactions between broker-dealers and financial institutions rather than between individual investors. The two brokers, meanwhile, limited their interpersonal communication on this matter to cell phone exchanges that were neither detected nor recorded by their firms.
Once their fraudulent parking activities came to light, both Gonnella and King were fired by their respective employers.
According to the SEC release, King has cooperated fully with SEC investigators in this matter, agreeing to disgorge (i.e. repay) any ill-gotten gains from the parking scheme. King’s disgorgement fee amounted to $22,606.80 along with interest of $1,503.66. Additionally, King agreed to remove himself completely from any involvement in the securities industry – meaning no contact with any brokers, dealers, investment advisors, or stock offerings – for a period of three years. After this time, he may apply for a return to the industry.
SEC litigation against Gonnella is ongoing. Andrew M. Calamari, director of the SEC Regional Office in New York, has described Gonnella’s allegedly illegal activities in this parking case.
Gonnella conducted trades for the purpose of avoiding his firm’s aged-inventory policy and protecting his own bonus…. [He] misled his employer and resorted to text messages on his cell phone to avoid detection, [but] his tricks failed and we are holding him accountable for these deceptive trades. (“SEC Announces Fraud Charges Against Two Wall Street Traders Involved in Parking Scheme.”)
Investigators examined textual exchanges between Gonnella and King in the case, looking for indications of the content of their cell phone communication. They found that the two men had rarely spoken or texted with one another during the previous four-year period. But, after Gonnella approached King with the scheme, instant messenger exchanges such as the one below were recorded.
Gonnella (to King): “Check your text [messages] in like 3 minutes.”
King: “haha, ok ... sneaky sneaky.”
The current order against Gonnella charges the Wall Street trader with violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, which concerns “Fraudulent Interstate Transactions” and Section 10(b) of the Securities Exchange Act of 1934, on “Position Limits and Position Accountability for Security-Based Swaps and Large Trader Reporting.” Additional areas of alleged illegal activity involve Rule 10b-5, and Sections 17(a) and Rule 17a-3 of the Exchange Act.