Virginia Man Pleads Guilty in “Free-Riding” Securities Fraud Scheme

Steven M. Dettelbach, United States Attorney for the Northern District of Ohio, today announced that Sean M. Daly was sentenced to 41 months' imprisonment and ordered to pay more than $5.7 million in restitution following his conviction by guilty plea to one count of securities fraud. The sentencing took place in Cleveland before the Honorable Chief Judge Solomon Oliver, Jr. in Case No. 1:09CR200.

Daly, age 50, resides in Middleburg, Virginia.

The charges in the case stated that 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.

Daly set and used accounts at various broker-dealers including KeyBanc Capital Markets, Inc.(f.k.a. McDonald Investments, 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. 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 used the names of nonexistent clients or shell companies. When payment came due, Daly falsely represented 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.

In one instance in April 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 KeyBanc Capital Markets, Inc.(f.k.a. 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.

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.