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The Investigative Committee has opened a criminal case against Russian investors who manipulated the prices of foreign shares by deceiving a trading robot owned by the financial company W-Imperial Holding Corp. (registered in the USA). The case was initiated under Part 4 of Article 159 of the Criminal Code (fraud committed by an organized group of persons). According to investigators, the actions of the accused led to losses of W-Imperial Holding for more than 150 million rubles. RBC got acquainted with a copy of the indictment in this case, its authenticity was confirmed by two sources familiar with the materials of the trial.
W-Imperial Holding acted as a market maker under an agreement with the broker Freedom Finance (in October 2022, it left Russia, the business was transferred to a new owner, the company was renamed Digital Broker). A market maker is a special trading participant that supports trading in financial instruments in an active state: its activity is necessary so that an investor who wants to buy or sell securities can always find a counterparty for a market transaction, even in the absence of counter-offers at a certain point in time.
The case file states that in 2022, at least two people — Zinchenko V. I. and Kuleshov S. P.-using accounts in Freedom Finance and another unidentified financial organization, made fictitious transactions with low-liquid American securities, first unreasonably reducing the price of them, and then dispersing it.
The market maker's algorithm worked on artificially set prices of securities and first sold the accused papers at a lower price, and then bought them back at a higher one. The spread (difference) between cheaper and more expensive transactions from February to May 2022 provided participants of the scheme with illegal income of 154.6 million rubles. According to another source familiar with the case, Kuleshov and Zinchenko are not the only ones accused of such manipulations.
RBC sent requests to Kazakhstan's Freedom Finance, Digital Broker and W-Imperial Holding Corp.
How the scheme was prepared
The materials of the case against Kuleshov say that in early February 2022, Zinchenko received information about the algorithm of the market maker's work — the company W-Imperial Holding Corp.
Zinchenko turned to Kuleshov and asked him to open a brokerage account and a deposit account in Freedom Finance, as well as a bank account. Funds in the amount of 6 million rubles were deposited to the brokerage account so that Kuleshov could receive the status of a qualified investor (without it, it is impossible to make transactions with low-liquid foreign securities). Then he gave the details of his account to Zinchenko, for which the latter promised to pay him 30 thousand rubles a month. Subsequently, Kuleshov withdrew money from the accounts and transferred it to Zinchenko through intermediaries, and also met with representatives of Freedom Finance — the case file states that Kuleshov tried to withdraw from such a meeting, but still went to it at the insistence of a lawyer.
Kuleshov himself did not make transactions with securities, but only opened accounts in a bank, broker and depository and transferred access to them to Zinchenko, according to the materials. The investigation was carried out by the Investigative Department for the Southern Administrative District of Moscow.
Both the accomplice and instigator are participants in the crime by virtue of Article 33 of the Criminal Code (defines the types of accomplices), explains lawyer Alexey Gavrishev. "It's another matter if the so-called drops (front persons whose accounts fraudsters use to withdraw money for a fee or by deception) were not aware [of the impending crime] and they were used in the dark. Then in the future they can acquire the status of an uninformed witness, " he says. In other cases, according to him, they will have to bear full responsibility.
"As practice has shown, often organizers use drops for this purpose, so that there is someone to shift responsibility to later. Here, the nominees face a false sense of partnership, and the organizers either lose contact or leave the country altogether. Moreover, this may concern not only ordinary people, but even nominal presidents of the bank, who are responsible for the actions of shareholders, " the expert says. The case file notes that Zinchenko went abroad in mid-March 2022.
The law enforcement system "is more important to show good disclosure, and not to reveal an objective picture of events, so drops are often responsible as organizers, especially in terms of damage and property," warns Gavrishev.
How transactions were made
After gaining access to Kuleshov's accounts, Zinchenko made a number of transactions with securities on his behalf, " allowing by deception to artificially trigger the algorithm in transactions for both the purchase and sale of securities, thus attracting W-Imperial Holding Corp. as a party to a fictitious transaction," the case file states. First, counter-orders were issued from affiliated accounts, which made it possible to bring down the price of paper and "force" the market maker to sell the portfolio at a lower price in accordance with its algorithm. Then, with the same fictitious transactions, the participants of the scheme dispersed the price of the same securities and "forced" the market maker to buy shares back from them at an inflated price.
"Suppose a person uses one of his accounts to make an order to buy 100 shares at a price of 50 rubles, and from another account makes an offer to sell 1 thousand shares at a price of 50 rubles. or less/more (if the real price for them is 80 rubles). The system calculated that a lot of shares were offered, while the demand for them was low — the offer price was 50 rubles, and there were few people willing to buy shares at this price-and set the share price to 50 rubles, " the special adviser on corporate issues KA Pen gives an example & Paper Natalia Bunina.
A large block of shares was purchased at a reduced price. Further, the price bounced and rose naturally (since before it was artificially lowered), the expert continues. "Plus, small orders were sent to the stock exchange to buy the same shares. The system determined that demand for these shares had increased and raised the price. For example, up to 80 rubles per share, i.e. up to their actual market price. At this point, he [the accused] was selling shares, and kept the cash difference on the transactions for himself," Bunina explains.
According to the regulations, the difference was covered by W-Imperial Holding Corp.'s own funds. That is, the attackers stole the company's funds. Since the participants of the scheme operated with a huge number of papers, this allowed them to receive income even with a small deviation that did not attract attention, the case file says.
Transactions were made in the period from February 14 to May 25, 2022 with medium - and low-liquid assets on the premarket or postmarket (before and after the main trading session). They involved almost 150 types of securities issued by foreign issuers. This is not an accident, but a tactic so that the system does not compare the price of orders with the orders of other market participants, since such a deviation would be noticeable, Bunina says.
Of the amount of 154.6 million rubles, about 58.56 million rubles were withdrawn from the accounts, and 96.05 million rubles were blocked by Freedom Finance due to the ongoing proceedings. The initial investment of the participant of the Zinchenko scheme was estimated at 14 million rubles.
How common is the scheme?
Lawyers interviewed by RBC see in the episode described signs of market manipulation (Article 185.3 of the Criminal Code of the Russian Federation). "The scheme used is illegal. Economically, it leads to artificial (manipulative) enrichment of one person at the expense of other persons (in this case, an individual was enriched at the expense of the site), and contains signs of market manipulation actions, " Bunina explains.
The involvement of several individuals in the scheme only aggravates the responsibility, the expert continues. But if the transactions were made from the accounts of one person, the scheme would still be illegal, adds Maria Yakovleva, director of the Yakovlev & Partners law Group. "Regardless of whether one or two accounts were used, the practice of artificially creating market conditions for profit is in itself a violation of the law. The use of two accounts to make transactions aimed at misleading the market maker's algorithm increases the illegality of actions, but the very essence of manipulation would also be illegal if using one account, " she explains.
The current scheme is not unique or unprecedented, although such cases are not very common, Bunina notes. Options for implementing schemes are "modified" to take into account technical barriers set by the exchange, market maker and other organizers, she explains.
A similar scheme has already been disclosed in Kazakhstan, and the affected party was the same W-Imperial Holding Corp. Back in 2019, a Kazakh trader received an income of $22.2 million due to deception of the market maker's algorithm using fictitious transactions with American securities, the Kursiv newspaper wrote. In July 2022, he was found guilty of fraud on a particularly large scale (paragraph 2 of Part 4 of Article 190 of the Criminal Code of the Republic of Kazakhstan) and sentenced to five years in prison. Part 4 of Article 159 of the Criminal Code of the Russian Federation, under which Kuleshov is accused, provides for up to ten years in prison.
"Wide publicity of this case will have a preventive value against the commission of similar actions by other market participants," Bunina believes. But even a guilty verdict will not create new norms of law, since the concept of "precedent" is not typical for the Russian legal system, adds Gleb Boyko, a lawyer in the NSP Sanctions and Compliance practice. "Although it is possible that some new approaches may appear on certain issues," the expert concludes.
• Source: https://www.rbc.ru/finances/18/07/2024/66964ccc9a79475ac542a351
W-Imperial Holding acted as a market maker under an agreement with the broker Freedom Finance (in October 2022, it left Russia, the business was transferred to a new owner, the company was renamed Digital Broker). A market maker is a special trading participant that supports trading in financial instruments in an active state: its activity is necessary so that an investor who wants to buy or sell securities can always find a counterparty for a market transaction, even in the absence of counter-offers at a certain point in time.
The case file states that in 2022, at least two people — Zinchenko V. I. and Kuleshov S. P.-using accounts in Freedom Finance and another unidentified financial organization, made fictitious transactions with low-liquid American securities, first unreasonably reducing the price of them, and then dispersing it.
The market maker's algorithm worked on artificially set prices of securities and first sold the accused papers at a lower price, and then bought them back at a higher one. The spread (difference) between cheaper and more expensive transactions from February to May 2022 provided participants of the scheme with illegal income of 154.6 million rubles. According to another source familiar with the case, Kuleshov and Zinchenko are not the only ones accused of such manipulations.
RBC sent requests to Kazakhstan's Freedom Finance, Digital Broker and W-Imperial Holding Corp.
How the scheme was prepared
The materials of the case against Kuleshov say that in early February 2022, Zinchenko received information about the algorithm of the market maker's work — the company W-Imperial Holding Corp.
Zinchenko turned to Kuleshov and asked him to open a brokerage account and a deposit account in Freedom Finance, as well as a bank account. Funds in the amount of 6 million rubles were deposited to the brokerage account so that Kuleshov could receive the status of a qualified investor (without it, it is impossible to make transactions with low-liquid foreign securities). Then he gave the details of his account to Zinchenko, for which the latter promised to pay him 30 thousand rubles a month. Subsequently, Kuleshov withdrew money from the accounts and transferred it to Zinchenko through intermediaries, and also met with representatives of Freedom Finance — the case file states that Kuleshov tried to withdraw from such a meeting, but still went to it at the insistence of a lawyer.
Kuleshov himself did not make transactions with securities, but only opened accounts in a bank, broker and depository and transferred access to them to Zinchenko, according to the materials. The investigation was carried out by the Investigative Department for the Southern Administrative District of Moscow.
Both the accomplice and instigator are participants in the crime by virtue of Article 33 of the Criminal Code (defines the types of accomplices), explains lawyer Alexey Gavrishev. "It's another matter if the so-called drops (front persons whose accounts fraudsters use to withdraw money for a fee or by deception) were not aware [of the impending crime] and they were used in the dark. Then in the future they can acquire the status of an uninformed witness, " he says. In other cases, according to him, they will have to bear full responsibility.
"As practice has shown, often organizers use drops for this purpose, so that there is someone to shift responsibility to later. Here, the nominees face a false sense of partnership, and the organizers either lose contact or leave the country altogether. Moreover, this may concern not only ordinary people, but even nominal presidents of the bank, who are responsible for the actions of shareholders, " the expert says. The case file notes that Zinchenko went abroad in mid-March 2022.
The law enforcement system "is more important to show good disclosure, and not to reveal an objective picture of events, so drops are often responsible as organizers, especially in terms of damage and property," warns Gavrishev.
How transactions were made
After gaining access to Kuleshov's accounts, Zinchenko made a number of transactions with securities on his behalf, " allowing by deception to artificially trigger the algorithm in transactions for both the purchase and sale of securities, thus attracting W-Imperial Holding Corp. as a party to a fictitious transaction," the case file states. First, counter-orders were issued from affiliated accounts, which made it possible to bring down the price of paper and "force" the market maker to sell the portfolio at a lower price in accordance with its algorithm. Then, with the same fictitious transactions, the participants of the scheme dispersed the price of the same securities and "forced" the market maker to buy shares back from them at an inflated price.
"Suppose a person uses one of his accounts to make an order to buy 100 shares at a price of 50 rubles, and from another account makes an offer to sell 1 thousand shares at a price of 50 rubles. or less/more (if the real price for them is 80 rubles). The system calculated that a lot of shares were offered, while the demand for them was low — the offer price was 50 rubles, and there were few people willing to buy shares at this price-and set the share price to 50 rubles, " the special adviser on corporate issues KA Pen gives an example & Paper Natalia Bunina.
A large block of shares was purchased at a reduced price. Further, the price bounced and rose naturally (since before it was artificially lowered), the expert continues. "Plus, small orders were sent to the stock exchange to buy the same shares. The system determined that demand for these shares had increased and raised the price. For example, up to 80 rubles per share, i.e. up to their actual market price. At this point, he [the accused] was selling shares, and kept the cash difference on the transactions for himself," Bunina explains.
According to the regulations, the difference was covered by W-Imperial Holding Corp.'s own funds. That is, the attackers stole the company's funds. Since the participants of the scheme operated with a huge number of papers, this allowed them to receive income even with a small deviation that did not attract attention, the case file says.
Transactions were made in the period from February 14 to May 25, 2022 with medium - and low-liquid assets on the premarket or postmarket (before and after the main trading session). They involved almost 150 types of securities issued by foreign issuers. This is not an accident, but a tactic so that the system does not compare the price of orders with the orders of other market participants, since such a deviation would be noticeable, Bunina says.
Of the amount of 154.6 million rubles, about 58.56 million rubles were withdrawn from the accounts, and 96.05 million rubles were blocked by Freedom Finance due to the ongoing proceedings. The initial investment of the participant of the Zinchenko scheme was estimated at 14 million rubles.
How common is the scheme?
Lawyers interviewed by RBC see in the episode described signs of market manipulation (Article 185.3 of the Criminal Code of the Russian Federation). "The scheme used is illegal. Economically, it leads to artificial (manipulative) enrichment of one person at the expense of other persons (in this case, an individual was enriched at the expense of the site), and contains signs of market manipulation actions, " Bunina explains.
The involvement of several individuals in the scheme only aggravates the responsibility, the expert continues. But if the transactions were made from the accounts of one person, the scheme would still be illegal, adds Maria Yakovleva, director of the Yakovlev & Partners law Group. "Regardless of whether one or two accounts were used, the practice of artificially creating market conditions for profit is in itself a violation of the law. The use of two accounts to make transactions aimed at misleading the market maker's algorithm increases the illegality of actions, but the very essence of manipulation would also be illegal if using one account, " she explains.
The current scheme is not unique or unprecedented, although such cases are not very common, Bunina notes. Options for implementing schemes are "modified" to take into account technical barriers set by the exchange, market maker and other organizers, she explains.
A similar scheme has already been disclosed in Kazakhstan, and the affected party was the same W-Imperial Holding Corp. Back in 2019, a Kazakh trader received an income of $22.2 million due to deception of the market maker's algorithm using fictitious transactions with American securities, the Kursiv newspaper wrote. In July 2022, he was found guilty of fraud on a particularly large scale (paragraph 2 of Part 4 of Article 190 of the Criminal Code of the Republic of Kazakhstan) and sentenced to five years in prison. Part 4 of Article 159 of the Criminal Code of the Russian Federation, under which Kuleshov is accused, provides for up to ten years in prison.
"Wide publicity of this case will have a preventive value against the commission of similar actions by other market participants," Bunina believes. But even a guilty verdict will not create new norms of law, since the concept of "precedent" is not typical for the Russian legal system, adds Gleb Boyko, a lawyer in the NSP Sanctions and Compliance practice. "Although it is possible that some new approaches may appear on certain issues," the expert concludes.
• Source: https://www.rbc.ru/finances/18/07/2024/66964ccc9a79475ac542a351
