## Facts

- Behruz Afshar and Shahryar Afshar were sophisticated options traders who controlled two trading entities, Fineline Trading Group LLC and Makino Capital LLC, each with brokerage accounts at the same firm.
- Richard F. Kenny, IV, a registered representative at the brokerage firm, assisted the Afshars’ trading activity.
- Options exchanges distinguish “public customer” orders (eligible for preferential fees and execution priority) from “professional” orders (non-customer/professional activity), including by applying a volume-based threshold that can reclassify an account as “professional” for a later quarter.
- The SEC found the respondents ran two fraudulent schemes in listed options markets: (1) mismarking orders to obtain “customer” priority and favorable economics, and (2) spoofing to obtain liquidity rebates.
- In the mismarking scheme, the Afshars shifted trading between Fineline and Makino to keep at least one account below the “professional” threshold and represented account characteristics in a way that concealed true ownership and trading activity.
- The respondents marked orders as “customer” when the activity should have been marked as “professional,” misleading exchanges about the order type and account status.
- The SEC found the mismarking yielded over $2 million in improperly avoided transaction fees and improperly received rebates, and it disadvantaged other market participants by giving the respondents execution priority at the same price.
- In the spoofing scheme, the respondents entered non-bona fide displayed orders they intended to cancel, creating a false appearance of market interest on one side while seeking executions on the other side.
- The spoofing conduct was used both to influence other participants’ trading and to capture exchange-paid liquidity rebates tied to displayed liquidity.

## Issues

1. Whether intentionally mismarking professional options trading activity as “customer” orders, and using account structure to preserve “customer” treatment, constituted a fraudulent and manipulative scheme under Section 17(a) of the Securities Act, Sections 9(a)(2) and 10(b) of the Exchange Act, and Rule 10b-5.
2. Whether placing and cancelling non-bona fide options orders to create false market interest and obtain liquidity rebates constituted market manipulation and securities fraud under the same provisions.
3. Whether the respondents’ experience and roles supported the mental-state requirements for violations requiring scienter.

## Decision

- The SEC instituted administrative cease-and-desist proceedings and resolved them by accepting the respondents’ offers of settlement without admissions or denials (except jurisdiction).
- The SEC found that each respondent violated Securities Act § 17(a), Exchange Act §§ 9(a)(2) and 10(b), and Exchange Act Rule 10b-5.
- The SEC ordered all respondents to cease and desist from future violations of the cited provisions.
- The SEC imposed industry association bars on Behruz Afshar and Richard F. Kenny, IV, with rights to apply for reentry after specified periods.
- The SEC ordered disgorgement, prejudgment interest, and civil penalties totaling over $1.89 million (allocated among the individual and entity respondents).

## Legal Principles

- Misrepresenting the nature of trading activity through systematic order-tagging (e.g., marking professional activity as “customer” to gain fee and priority advantages) can constitute a deceptive scheme actionable as securities fraud, not merely an exchange-rule violation.
- A pattern of transactions that creates false market conditions or apparent trading interest, and is intended to induce others’ trading, may violate Exchange Act § 9(a)(2).
- Spoofing—placing orders without intent to execute and cancelling them to mislead the market and benefit related trading—may constitute deception under Exchange Act § 10(b) and Rule 10b-5 and manipulation under § 9(a)(2).
- Scienter may be inferred from the conduct’s design and from participants’ experience and roles (e.g., sophisticated traders and registered representatives implementing and facilitating the schemes).

## Conclusion

The SEC concluded that the respondents’ customer-order mismarking and liquidity-rebate spoofing were deceptive and manipulative options-trading schemes violating Securities Act § 17(a), Exchange Act §§ 9(a)(2) and 10(b), and Rule 10b-5, and it imposed cease-and-desist relief, industry bars, and substantial monetary sanctions.


In re Behruz Afshar, Exchange Act Release No. 78043 (SEC June 13, 2016)