Someone was asleep at the wheel at more than a half-dozen brokerage firms around the country when Scott Kupersmith came to town, and failure to spot his scam cost their companies more than $2 million.
Kupersmith, 47, has now pleaded guilty to federal fraud charges for running a “free-riding” operation based almost purely on deceit. The U.S. Department of Justice said Kupersmith, formerly of New Jersey and most recently headquartered in Boca Raton, Fla., opened accounts at various brokerages, claiming he ran a $10 million Manhattan hedge fund and had $5 million in personal assets.
The brokerages then allowed Kupersmith and a partner to “free-ride,” trading stocks without putting up any assets. When they won in the market, the men raked in the money, the FBI said. When their long stock bets were unsuccessful, they simply walked away and left the broker-dealers to swallow the losses.
All told, Kupersmith and his partner made $600,000 through their trades, prosecutors said, but that was dwarfed by $2 million the broker-dealers lost.
In a 2011 litigation announcement, the Securities and Exchange Commission said Kupersmith and another Florida trader, 42-year-old Frederick Chelly, pulled the scam in 2009 and 2010. So far, Kupersmith alone has been reported to enter a plea to criminal charges.
The two opened numerous trading accounts, claiming they held substantial securities and cash with a third-party custodial bank. Broker-dealers then allowed them to trade through unsecured accounts known as “Delivery Versus Payment/Receipt Versus Payment,” the SEC said.
Chelly allegedly opened trading accounts through the name of his company, Antibe Arbitrage Group, Inc. Kupersmith did his trading through an account for Atlantic Southern Capital Group and several other corporations, regulators said.
It worked like this: Kupersmith and Chelly would buy and sell the same quantity of stocks in the same companies through various accounts on the same day, profiting from swings in share prices.
When the scheme finally unraveled in late October 2011, Kupersmith found FBI agents knocking at the door of his Boca Raton office. His case was prosecuted by the U.S. Attorney’s Office in the District of New Jersey, where his guilty plea was announced May 29.
He faces a maximum prison term of 20 years and a possible $5 million fine. The likelihood of his being able to pay that much is cloudy: During his prosecution, the once high-flying free-rider was represented by a federal public defender, the government said.
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James Welsh is a financial writer specializing in compliance and securities fraud issues. He also authors the “Top 10” column at www.thestreetsweeper.org, and has held staff editing and writing positions at newspapers including The Times-Picayune of New Orleans and the Orange County (Calif.) Register.