Securities and Exchange Commission v. Lek Securities Corporation et al

Filing 351

OPINION AND ORDER.....The Lek Defendant's August 24, 2018 motion for summary judgment is denied. (Signed by Judge Denise L. Cote on 3/26/2019) (gr)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
SECURITIES AND EXCHANGE COMMISSION,
:
:
Plaintiff,
:
:
-v:
:
LEK SECURITIES CORPORATION, SAMUEL
:
LEK, VALI MANAGEMENT PARTNERS d/b/a
:
AVALON FA, LTD., NATHAN FAYYER, and
:
SERGEY PUSTELNIK a/k/a SERGE PUSTELNIK :
:
Defendants.
:
:
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17cv1789 (DLC)
OPINION AND ORDER

APPEARANCES
For plaintiff Securities and Exchange Commission:
David J. Gottesman
Olivia S. Choe
Sarah S. Nilson
U.S. Securities and Exchange Commission
100 F Street NE
Washington, DC 20549
For defendants Lek Securities Corporation and Samuel Lek:
Steve M. Dollar
David B. Schwartz
Norton Rose Fulbright US LLP
1301 Avenue of the Americas
New York, NY 10103
Kevin J. Harnisch
Norton Rose Fulbright US LLP
799 9th Street NW, Suite 1000
Washington, DC 20001
Ronald D. Smith
Norton Rose Fulbright US LLP
2200 Ross Avenue, Suite 3600
Dallas, TX 75201

DENISE COTE, District Judge:
On August 24, 2018, defendants Lek Securities Corp. (“Lek
Securities”) and Samuel Lek (“Lek”; together with Lek
Securities, the “Lek Defendants”) filed a motion for summary
judgment seeking dismissal of all claims brought against them by
the U.S. Securities and Exchange Commission (“SEC”).

The SEC

has brought claims against the Lek Defendants for violations of:
§ 20(e) of the Securities Exchange Act of 1934 (“Exchange Act”)
and § 15(b) of the Securities Act of 1933 (“Securities Act”) for
aiding and abetting the primary violations of Avalon FA Ltd.
(“Avalon”), Nathan Fayyer (“Fayyer”), and Sergey Pustelnik
(“Pustelnik”; together with Avalon and Fayyer, the “Avalon
Defendants”); § 17(a)(3) of the Securities Act as a primary
violator; and § 20(a) of the Exchange Act based on the Lek
Defendants’ control of Pustelnik, who the SEC alleges violated
§ 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder.

SEC v. Lek Sec. Corp., 276 F. Supp. 3d 49, 57-58

(S.D.N.Y. 2017).
The SEC’s allegations concern two schemes to manipulate the
U.S. securities markets.

The first scheme involved Avalon’s

alleged use of a trading strategy referred to as layering.

A

trader engaged in layering typically places a large number of
buy (or sell) orders on one side of the market without intending
to execute those orders.

The trader does so to increase the
2

perceived demand (or supply) of the stock and to influence the
price per share or volume of shares the trader is able to sell
(or buy) on the opposite side of the market.

See SEC v. Lek

Sec. Corp., No. 17cv1789(DLC), 2019 WL 1198599, at *2-3
(S.D.N.Y. Mar. 14, 2019).

The SEC claims that Avalon engaged of

hundreds of thousands of instances of layering through Lek.

Id.

at *3.
The second alleged scheme is a Cross-Market Strategy.

In a

Cross-Market Strategy, a trader manipulates the prices of
options through trading in the corresponding stocks.
*8.

See id. at

The SEC claims that Avalon engaged in the Cross-Market

Strategy over 600 times through Lek.

Id. at *9.

A motion for summary judgment may not be granted unless all
of the submissions taken together “show[] that there is no
genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.”
56(a).

Fed. R. Civ. P.

“A genuine issue of material fact exists if the evidence

is such that a reasonable jury could return a verdict for the
nonmoving party.”

Nick’s Garage, Inc. v. Progressive Cas. Ins.

Co., 875 F.3d 107, 113 (2d Cir. 2017) (citation omitted).

The

moving party bears the burden of demonstrating the absence of a
material factual question.
46, 48 (2d Cir. 2015).

Gemmink v. Jay Peak Inc., 807 F.3d

In making this determination, the court

must “view the evidence in the light most favorable to the party
3

opposing summary judgment” and “draw all reasonable inferences
in favor of that party.”

Weyant v. Okst, 101 F.3d 845, 854 (2d

Cir. 1996).
Once the moving party has asserted facts showing that the
non-movant’s claims or affirmative defenses cannot be sustained,
the party opposing summary judgment “must set forth specific
facts demonstrating that there is a genuine issue for trial.”
Wright v. Goord, 554 F.3d 255, 266 (2d Cir. 2009) (citation
omitted).

“[C]onclusory statements, conjecture, and

inadmissible evidence are insufficient to defeat summary
judgment,” Ridinger v. Dow Jones & Co. Inc., 651 F.3d 309, 317
(2d Cir. 2011) (citation omitted), as is “mere speculation or
conjecture as to the true nature of the facts.”

Hicks v.

Baines, 593 F.3d 159, 166 (2d Cir. 2010) (citation omitted).
Only disputes over material facts will properly preclude the
entry of summary judgment.

Anderson v. Liberty Lobby, Inc., 477

U.S. 242, 248 (1986).
In bringing this motion, the Lek Defendants emphasize that
they had a surveillance system which they improved over time,
that the system prevented many manipulative trades, and that
regulators failed to respond adequately to the Lek requests for
assistance to improve the system.

They assert that they are

entitled to summary judgment because the SEC has presented
insufficient evidence that Avalon engaged in manipulative
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trading, that the Lek Defendants assisted Avalon, or that Lek
Securities controlled Pustelnik.

These arguments are addressed

in turn.
I.

Avalon’s Primary Violations
The Lek Defendants principally argue that the record

contains insufficient evidence to support a violation of the
securities laws by the Avalon Defendants.

Through two experts,

the SEC has offered detailed analyses of the Avalon trading that
purports to demonstrate voluminous trading consistent with the
two alleged manipulative trading strategies.
2019 WL 1198599, at *3-5, 8-11.

Lek Sec. Corp.,

The motion to exclude testimony

from those experts was recently denied.

Id. at *14-16.

The Lek

Defendants contend that, even with a denial of their motion to
strike the SEC expert testimony, summary judgment is nonetheless
appropriate.
According to the Lek Defendants, the SEC has failed to show
market manipulation since a market manipulation scheme requires
the SEC to offer evidence that Avalon injected false price
information into the market.

Because every order Avalon placed

was a “real, actionable” order, the Lek Defendants reason that
the Avalon orders were incapable of sending false price signals
into the market.

This very argument was rejected in the

decision denying the Lek Defendants’ motion to dismiss.
Sec. Corp., 276 F. Supp. 3d at 64.
5

Lek

As explained there, the

defendants’ position that open market orders may never
constitute manipulative conduct is not the law.

Id. 1

With respect to the Cross-Market Strategy in particular,
the Lek Defendants also contend that Avalon’s trading strategy
was not manipulative because it was part of “price discovery”
and hedging strategies.

Given these legitimate economic

purposes, they argue that there can be no finding that the
Avalon trading connected to the alleged Cross-Market Strategy
was manipulative.

This line of argument also fails.

The Lek

Defendants do not point to any affirmative evidence that they
have offered to demonstrate what trading strategy or strategies
Avalon was pursuing in connection with the accused trading.

For

instance, they have not presented expert testimony that defines
the characteristics of any particular trading strategy, that
demonstrates how one can locate that strategy from an
examination of a body of trades, and that identifies the
specific trades that conformed to that strategy.

While they

offered expert testimony to rebut the testimony of the two SEC

The Lek Defendants have relied to some extent on CFTC v.
Wilson, No. 13cv7884(RJS), 2018 WL 6322024 (S.D.N.Y. Nov. 30,
2018). Wilson concerned a different alleged manipulative scheme
and is inapposite. Moreover, the defendants in Wilson offered
evidence of a legitimate economic rationale underlying the
trading strategy they designed. Avalon has not offered
admissible evidence of either the trading strategy it was
pursuing or a legitimate economic rationale for it.
1

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experts, the defendants’ expert reports disclosed no independent
analysis of the Avalon trading.

Conclusory opinion testimony

does not raise a question of fact.

Major League Baseball

Props., Inc. v. Salvino, Inc., 542 F.3d 290, 310-11 (2d Cir.
2008). 2
Nor have the Lek Defendants provided declarations from fact
witnesses, such as the traders who were responsible for
designing a trading strategy, to support their motion for
summary judgment.

But, even if the Lek Defendants had filled

either of these evidentiary gaps, the analyses of the Avalon
trading performed by the two SEC experts would raise questions
of fact regarding whether Avalon was engaged in market
manipulation.

From the testimony provided by these two SEC

experts and the other evidence to which the SEC points, the
record contains evidence from which a jury could conclude that
the Avalon Defendants engaged in layering and the Cross-Market
Strategy with the intent to manipulate the market.

Either of

these strategies would constitute a violation of § 10(b) of the
Exchange Act if proven at trial.

Four of the SEC’s Daubert motions to exclude the defense expert
testimony have been addressed and they have been granted in
whole or in part. Lek Sec. Corp., 2019 WL 1198599, at *16-27;
SEC v. Lek Sec. Corp., No. 17cv1789(DLC), 2019 WL 1304452, at
*3-4 (S.D.N.Y. Mar. 21, 2019).
2

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II.

Aiding and Abetting
The Lek Defendants also argue that there is insufficient

evidence that they aided and abetted Avalon’s alleged violations
of the securities laws.

They contend principally that they were

properly responsive to regulators’ concerns about layering and
that they only provided services to Avalon that brokers provide
to all customers.
To prevail on a claim of aiding and abetting, the SEC must
prove two elements in addition to the existence of a primary
violation by the Avalon Defendants:

“[1] knowledge of [a]

violation on the part of the aider and abettor; and [2]
substantial assistance by the aider and abettor in the
achievement of the primary violation.”

SEC v. Apuzzo, 689 F.3d

204, 211 (2d Cir. 2014) (citation omitted).

In opposition to

the Lek Defendants’ motion for summary judgment, the SEC has
presented evidence that raises a genuine issue of fact as to
both of these elements.
With respect to the Lek Defendants’ knowledge of the
schemes, the SEC points to the Lek Defendants’ receipt of
numerous regulatory inquiries identifying patterns of
manipulative trading within Avalon subaccounts.

They also point

to Lek’s responses to these inquiries, which the SEC contends
were either inadequate or misleading.

In addition, the SEC

offers evidence that at Avalon’s request the Lek Defendants
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adjusted their internal control system -- the Q6 Layering
Control system -- to relax controls for certain Avalon
subaccounts.

The SEC relies as well on a series of e-mails

between Lek and an individual trader who was seeking to engage
in layering.

Although Avalon and the SEC dispute the inferences

to be drawn from the correspondence, the trader opened a
subaccount at Lek Securities through which thousands of orders
allegedly consistent with layering were placed.

This evidence,

which is not the only evidence on which the SEC relies, is
sufficient to raise a genuine issue as to the Lek Defendants’
knowledge of Avalon’s alleged violations.
The SEC also points to evidence that Lek Securities’
registered representative Pustelnik knew of and furthered
Avalon’s manipulative schemes.

Pustelnik’s knowledge of

Avalon’s primary violations may be imputed to the Lek Defendants
if he was acting within the scope of his employment and in the
interests of the corporation.
F.3d 79, 87 (2d Cir. 2000).

Wight v. BankAmerica Corp., 219
While the Lek Defendants argue

against imputation, there are factual disputes that must be
resolved at trial.
The SEC has also pointed to evidence that the Lek
Defendants provided substantial assistance to Avalon.

First and

foremost, Lek Securities provided brokerage services.

The fact

that it is the business of a brokerage company to provide such
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services to its customers does not mean that those services are
not of substantial assistance to manipulative traders.

Lek Sec.

Corp., 276 F. Supp. 3d at 65; see also Graham v. SEC, 222 F.3d
994, 1004 (D.C. Cir. 2000).
The SEC also points to what it characterizes as Lek
Securities’ flawed and inconsistent use of the Q6 Layering
Control system, as mentioned above.

The Lek Defendants also

provided Avalon with technology and capital that allowed Avalon
traders to engage more effectively in the allegedly manipulative
Cross-Market Strategy.

This evidence raises a question of

material fact regarding substantial assistance for the jury to
resolve.
The Lek Defendants’ citation to Armstrong v. McAlpin, 699
F.2d 79 (2d Cir. 1983), does not support their motion.

Although

the court in Armstrong was not prepared to hold a broker liable
as an aider and abettor for “merely execut[ing] an investment
manager’s [improper] orders,” the court concluded that the
complaint alleged sufficient evidence to support a claim for
aiding and abetting against a broker-dealer.

Id. at 91.

The

court highlighted that the complaint included allegations of
“greater wrongdoing,” including that the defendant “acted as
broker for substantially all the [transactions at issue] with
knowledge of their fraudulent nature in order to generate
commissions for himself.”

Id.
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Here, the SEC points to evidence that, as Avalon’s brokerdealer, the Lek Defendants knew of and furthered Avalon’s
improper orders in order to generate additional commissions for
the company.

In addition, the SEC points to statements by

Fayyer from which a jury could conclude that Avalon viewed Lek
Securities as “the only solution” for traders seeking to engage
in layering or the Cross-Market Strategy. 3
III.

Lek’s Primary Violation
The Lek Defendants argue that the SEC has not adduced

evidence that the Lek Defendants committed a primary violation
of the securities laws.

The Lek Defendants are mistaken.

Primary liability may be imposed not only on persons who
initiate a scheme of manipulation, “but also on those who had
knowledge of the fraud and assisted in the perpetration.”

SEC

v. First Jersey, 101 F.3d 1450, 1471 (2d Cir. 1996) (citation
omitted).
The evidence to which the SEC points includes evidence that
the Lek Defendants relaxed controls under its Q6 Layering
Nor is Levitt v. J.P. Morgan Securities, Inc., 710 F.3d 454 (2d
Cir. 2013), instructive here. That case addressed, in the
context of a motion for class certification, the liability of a
clearing broker for aiding and abetting an allegedly
manipulative trading scheme. Id. at 457. The Court of Appeals
drew a sharp distinction between clearing brokers, whose
involvement in a transaction ordinarily “begins after the
execution of a trade,” and introducing brokers, which bear “the
burden of monitoring trades.” Id. at 466-67. Lek Securities is
not a clearing broker.
3

11

Control system, misled regulators concerning the actions it took
to address potential market manipulation, installed and financed
technological improvements at the request of the Avalon
Defendants, and provided Avalon access to the U.S. securities
markets notwithstanding numerous regulatory inquiries about
potentially manipulative trading in Avalon subaccounts.
IV.

Control Liability
Finally, the Lek Defendants contend that they cannot be

held liable under § 20(a) of the Exchange Act because the SEC
has not demonstrated that the Lek Defendants controlled
Pustelnik, their registered representative.

In the alternative,

the Lek Defendants argue that they should not be liable for
Pustelnik’s violations because they acted in good faith.

The

SEC, however, points to several facts from which a jury could
conclude that the Lek Defendants controlled Pustelnik, including
with respect to the specific actions that form the basis for
Pustelnik’s alleged securities law violations, and that much of
Pustelnik’s allegedly violative conduct fell within the scope of
his employment.

The SEC also points to evidence from which a

reasonable jury could infer that Lek Securities did not act in
good faith.

The SEC has shown that there are material factual

disputes that are inappropriate for resolution on summary
judgment.

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Conclusion
The Lek Defendant’s August 24, 2018 motion for summary
judgment is denied.
Dated:

New York, New York
March 26, 2019
____________________________
DENISE COTE
United States District Judge

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