## Facts

- Terrance Yoshikawa was a registered representative and the president, sole owner, and head trader of an NASD member firm.
- From February to May 1999, he engaged in 19 instances of trading in three Nasdaq-listed securities: Anadigics, Inc. (ANAD), VSIO Corp. (VSIO), and Advanced Digital Info. Corp. (ADIC).
- Yoshikawa entered small 100-share limit orders that were designed to improve the inside quote for a security.
- After the quote moved, an associate promptly entered much larger orders on the opposite side of the market to obtain favorable automatic executions at the improved price.
- Yoshikawa then canceled the initial 100-share orders after the larger opposite-side orders executed.
- NASD found the scheme produced approximately $5,375 in profits that otherwise would not have been available.
- Yoshikawa offered shifting explanations, including mistake/changed mind and later “testing for hidden orders,” while acknowledging he knew the initial orders would change execution prices, coordinated timing with an associate, and selected venues likely to auto-execute.
- NASD found violations of federal antifraud provisions and NASD Conduct Rules and imposed a bar from association with any NASD member in any capacity; Yoshikawa sought SEC review.

## Issues

1. Whether placing small quote-improving orders to affect the inside market, coordinating larger opposite-side orders to exploit the induced price change, and then canceling the initial orders constitutes a manipulative and deceptive scheme under Exchange Act § 10(b), Rule 10b-5, and NASD Conduct Rules.
2. Whether the record supported scienter and deceptive conduct where the trader admitted knowledge of quote effects, coordinated timing with an associate, and repeatedly canceled the initiating orders.
3. Whether a bar from association with any NASD member in any capacity was excessive or oppressive given the misconduct.

## Decision

- The SEC sustained NASD’s findings that Yoshikawa engaged in a manipulative trading scheme violating Exchange Act § 10(b), Rule 10b-5, and NASD Conduct Rules.
- The SEC found the initiating orders were not genuine expressions of trading interest but were placed to artificially affect quotes so larger opposite-side orders could profit from automatic execution.
- The SEC concluded Yoshikawa acted with scienter based on his knowledge of the sequence’s effects, advance coordination with an associate, and venue selection to obtain auto-execution.
- The SEC rejected the claim that facially valid orders or reliance on a platform’s auto-execution practices negated manipulation where the overall sequence was designed to mislead the market.
- The SEC sustained the NASD sanction barring Yoshikawa from association with any NASD member firm in any capacity.

## Legal Principles

- A coordinated sequence of orders placed to artificially move the inside quote, followed by opposite-side trades that exploit the induced price change, and rapid cancellation of the initiating orders can constitute a “device, scheme, or artifice to defraud” and a manipulative practice under Exchange Act § 10(b) and Rule 10b-5.
- Facial validity of individual orders and use of lawful market features (including auto-execution) do not immunize conduct when those mechanisms are used as part of a deceptive scheme.
- Scienter may be inferred from admissions and repeated conduct showing knowledge of quote effects, intentional coordination with others, and purposeful use of venues expected to provide favorable executions.
- In reviewing self-regulatory organization sanctions, the SEC sustains sanctions that are not excessive or oppressive and that protect investors and market integrity, particularly for intentional, repeated manipulation by a firm principal.

## Conclusion

The SEC affirmed NASD’s determination that Yoshikawa’s repeated placement of small quote-moving orders, coordinated opposite-side trading to profit from auto-execution, and subsequent cancellation of the initiating orders was intentional, deceptive manipulation under federal antifraud law and NASD rules, and it upheld a full industry bar as an appropriate protective sanction.


In re Yoshikawa, 2006 WL 1113518 (S.E.C. Apr. 26, 2006)