William J. Edwards, United States Attorney for the Northern District of Ohio, today announced that an Information was filed charging Sean M. Daly with Securities Fraud.
Daly, age 49, resides in Middleburg, Virginia.
According to the Information, from in or about September 2000, through in or about late December 2007, Sean M. Daly, the defendant, engaged in a “free-riding” scheme through at least seven different broker-dealers, resulting in an overall actual loss of approximately $5.7 million.
“Free-riding” involves a customer placing an order for stock for which they do not have sufficient funds to cover the purchase price. The customer then uses some or all of the proceeds of the sale of the same stock to cover the purchase price. The “free-rider” attempts to profit from short-term changes in market prices of securities, without placing significant personal funds at risk. “Free-riders” frequently place a buy order for securities, anticipating a near-term market price increase, and intending to pay for the securities with the proceeds from the sale of the same securities.
The Information states that Daly set and used accounts at various broker-dealers including McDonald Investments, Inc. (n.k.a. KeyBanc Capital Markets, Inc.), Dain Rauscher, Inc. (n.k.a. RBC Dain Rauscher, Inc.), Ryan Beck & Co., Inc. (n.k.a. Stifel Nicolaus & Co.), Jesup & Lamont Securities Corp., Jeffries & Company, Inc., Raymond James & Associates, Inc., and Robert W. Baird & Co. Daly also used and held trading accounts in various company names at National Financial Services, Goldman Sachs Execution & Clearing, LP, Charles Schwab, and Lloyds of London Market Services.
Daly used these accounts to purchase millions of dollars worth of securities, in the form of stock in publicly-traded companies, without sufficient funds in the accounts. The Information alleges that Daly intended to make money on an upward rise in the price of the stock from the time of the order to the time payment was required, also referred to as the settlement date.
After ordering the stocks, Daly would monitor the market price during a three-day waiting period. When the executing brokerage firm attempted to make delivery of the stock to accounts Daly designated, Daly would not take delivery of stocks which had experienced a downward drop in price after the order date.
In order to promote the scheme, Daly issued press releases which purported to be independent financial analyses and research reports which falsely promoted the stocks in which he had a pending order. These had no basis in fact but, rather, were used to artificially increase the price of the stock in which Daly had traded in order to avoid the required payment on a losing trade; that is, where the stock price had dropped since the time of the order to the time of the settlement date.
In order to conceal the scheme, Daly would use the names of nonexistent clients, or shell companies. When payment came due, Daly would falsely represent that he was waiting for an “overseas” client to make payment when, in truth and in fact, there was no such client. Daly did this to further lull the broker-dealer into the belief that the required payment would be made.
The Information specifically alleges that in April of 2005, Daly, doing business as Daly Holdings, Inc., placed an order for the purchase of 250,000 shares of stock (Decker Outdoor Corporation; NASDAQ Ticker Symbol: DECK) through McDonald Investments, Inc. These orders were placed through an account for the benefit of Event Driven Value, Inc. which, in fact, was an entity he controlled. Daly placed the orders knowing he did not have the funds necessary to promptly make full cash payment for acquiring the stock.
In order to conceal his free-riding scheme, Daly contacted McDonald Investments, Inc., asking for an extension of time to pay on behalf of Event Driven Value, Inc., falsely stating that a purported “client” of Daly Holdings, Inc. in Europe failed to pay when he then and there well knew no such client existed. At that time, after further inability to provide funds, McDonald Investments, Inc. liquidated the DECK stock and suffered a loss of $1,013,272.56.
If convicted, the defendant’s sentence will be determined by the Court after review of factors unique to this case, including the defendant’s prior criminal record, if any, the defendant’s role in the offense and the characteristics of the violation. In all cases the sentence will not exceed the statutory maximum and in most cases it will be less than the maximum.
This case is being prosecuted by Assistant U.S. Attorney Justin J. Roberts, following investigation by the Cleveland office of the Federal Bureau of Investigation.
An Information is only a charge and is not evidence of guilt. A defendant is entitled to a fair trial in which it will be the government’s burden to prove guilt beyond a reasonable doubt.
|