Most financial advice will usually include investing in the stock market to gain returns on your funds. While it can be volatile, the stock market can be extremely lucrative for many people. One particularly risky route to the stock market is day trading, the act of rapidly buying and selling stocks throughout the day to gain quick profits. Day trading is not illegal when it is done within normal trade hours and properly recorded. However, a similar practice known as late day trading is illegal and can be prosecuted under commodities fraud law.
Day Trading and Late Day Trading
In day trading, the goal is for stocks to climb and fall in value during the seconds or minutes that the trader owns those stocks, letting them lock in profit. A day trader usually uses borrowed money and hopes to reap higher profits during this process. Though this is entirely legal, it can be extremely risky and come with huge losses in the course of minutes.
The same is true of late day trading, but these trades take place outside of normal stock market hours and are then recorded as if they were executed prior to the end of that day’s market. In doing so, these traders are able to use market information that may not have been available to other market participants during trading hours. Because of this unfair advantage, late day trading is taken seriously by federal agencies and can be prosecuted as both a civil and a criminal offense.
Late Day Trading Legislation
Prior to 1968, late day trading was a normal practice known as “backward pricing,” in which you could buy mutual funds at the previous closing price. In 1968, the SEC issued Rule 22c-1 to prevent this type of exploitation. There are three different areas of the law that apply to this practice.
Pricing of Securities- This section specifically requires all orders received after the daily NAV calculation to be priced based on the next day. When this isn’t followed, it is charged as improper pricing of securities.
Market Manipulation- It is a felony to manipulate the price of a stock or commodity. In order to be convicted of this, a prosecutor has to prove that the manipulation was intentional, either through illegal trade practices or false or misleading statements.
Fraud on the Market- This charge involves knowingly executing a fraudulent scheme on the market or in connection with a security. Even attempting a scheme that defrauds other market participants can subject you to liability under this rule.
Depending on your role in these acts, penalties can vary, but fines are defined as up to $1 million and up to 10 years in prison.
Investigation into Late Day Trading
The SEC, or Securities and Exchange Commission, is the primary governmental body responsible for any investigations into charges of securities and commodity fraud, including late day trading. The securities market is also regulated by the Financial Industry Regulatory Authority (FINRA) and individual markets like the New York Stock Exchange (NYSE).
Anyone who sells stocks or bonds should be a member of FINRA, which represents and regulates all stock and bond brokerage firms and their employees. FINRA also administers background checks and licensing exams to all employees registered to sell securities.
An investigation into late day trading may involve questioning, diving into financial records, and pulling computer records to determine the time of your activity.
Defending Against Securities Fraud Charges
Like many fraud laws, commodity and securities fraud require intent and knowledge to be convicted. A defense attorney will first look at whether you had intent to manipulate the market, knowledge of a late day trading scheme, or even knowledge of these laws as a way to prove you are not guilty under the law.
Many accusations will include collusion with someone like a mutual fund manager or a hedge fund manager. Being able to disprove that you worked with these parties can also be helpful as it will remove the notion that you were working with experts to manipulate the market.
If you are accused of late day trading, it is critical that you work with a lawyer skilled in these financial fraud laws who can help you navigate the legal process. From early interrogations through trial, their understanding of the nuances in commodity fraud will be crucial to helping you maintain freedom.
