On May 13, 2024, the Securities and Exchange Commission (SEC) charged 25-year-old Tyrone Johnny Lacy, Jr. (“Lacy”) from Sefner, Florida, with orchestrating a fraudulent “free-riding” scheme. Lacy exploited credits provided by certain broker-dealers to purchase over $300,000 in securities without having the necessary funds to cover the costs.

Case Summary

The plaintiff, the Securities and Exchange Commission (“Commission”), files this Complaint and alleges the following:

This case pertains to a “free-riding” trading scheme orchestrated by defendant Tyrone Johnny Lacy, Jr. (“Lacy” or “Defendant”), a resident of Seffner, Florida. In typical free-riding schemes, Lacy fraudulently exploited “instant deposit” credits provided by two broker-dealer firms to trade securities without actually funding the brokerage accounts. If the trades were profitable, Lacy would keep the profits; if unprofitable, the brokerage firm would incur the losses.

To carry out the scheme, Lacy initiated electronic deposits from his bank accounts into his brokerage accounts, despite knowing his bank accounts lacked sufficient funds. He then bought and sold securities in these accounts, using the “instant deposit” credits provided by the brokerage firms, which allowed him to trade before the funds were actually deposited.

As part of this scheme, Lacy falsely represented his profession, salary, and available cash to one brokerage firm. He made $270,000 in unfunded deposits across two brokerage accounts, all of which were reversed due to insufficient funds. Based on these false deposits, Lacy traded approximately $330,000 in equity and exchange-traded securities, causing one brokerage firm to lose over $1,500 due to unfunded trading losses and personally obtaining over $1,600 in illicit gains.

By engaging in this conduct, Lacy is liable and, unless enjoined, is likely to continue violating Section 10(b) of the Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder.

Violations

Through his actions, Lacy has directly or indirectly violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder.

Relief Sought

The Commission seeks the following relief against the Defendant:

1. permanent injunctive relief;
2. a conduct-based injunction prohibiting Lacy from:
3. directly or indirectly trading securities in any brokerage account he owns, controls, or has access to without having settled cash equal to or greater than the amount of the securities trades, and
4. opening a brokerage account without first providing the relevant brokerage firm(s) with a copy of the Commission’s filed complaint in this matter and any judgment obtained against him;
5. disgorgement, including pre-judgment interest; and
6. civil monetary penalties

The Defendant

TYRONE JOHNNY LACY, JR.

Tyrone Johnny Lacy, Jr., age 25, resides in Seffner, Florida. During the relevant period, as defined below, he was employed as a warehouse and backroom worker for various retailers and a consumer electronics distributor.

Facts Of The Case

From at least October 1, 2022, to October 26, 2022 (the “Relevant Period”), Lacy engaged in fraudulent activities, including making false and misleading statements to multiple brokerage firms.

A. LACY ENGAGES IN FREE-RIDING CONDUCT AT BROKER A

On or about November 19, 2021, Lacy submitted an online application to open an account at Broker A, which subsequently opened an account in his name. This account provided "instant buying power" for pending bank deposits, allowing Lacy to trade securities before his bank deposits settled into the account.

Using Broker A’s online platform, Lacy linked his Broker A account to his bank accounts at Bank X and Bank Y. In October 2022, Lacy initiated three Automated Clearing House deposits totaling $70,000 from his account at Bank X into his Broker A account. Specifically, he initiated (i) a $20,000 deposit on October 3 and (ii) two $25,000 deposits on October 4 and 5. At the time, Lacy’s account at Bank X did not have sufficient funds to cover these deposits.

On October 6, 7, and 10, 2022, these deposits were rejected due to insufficient funds in Lacy’s Bank X account. By initiating these $70,000 in unfunded deposits, Lacy implicitly falsely represented that there were sufficient funds in his Bank X account. He knew, or was reckless in not knowing, that these statements were false.

These false statements to Broker A were material, as a reasonable broker-dealer firm would consider them in deciding whether to allow Lacy to maintain and trade in the account. From October 3 to 10, 2022, Lacy used Broker A’s “instant buying power” to make approximately $2,700 in securities purchases, including orders for common stock in Public Company A, Public Company B, and Public Company C.

On October 10, 2022, Lacy sold these securities at a net profit. On October 19, 2022, he used Broker A’s online platform to withdraw $183 from his Broker A account and deposit it into his account at Bank Y.

Lacy acted with scienter regarding his free-riding conduct at Broker A. He knew, or was reckless in not knowing, that his account at Bank X lacked sufficient funds when he initiated the unfunded deposits and subsequently traded securities. Additionally, Lacy was aware of free-riding schemes before and during the Relevant Period.

B. LACY ENGAGED IN FREE-RIDING CONDUCT AT BROKER B

On or about October 23, 2022, Lacy submitted an online application to open an account at Broker B, which was subsequently opened in his name. In his application, Lacy made false statements, claiming: (1) an annual income of $180,000; (2) a liquid net worth of $500,000; and (3) that he was an “accounting professional.” These statements were false, as Lacy did not have an annual income of $180,000, a liquid net worth of $500,000, nor was he an accounting professional. He knew or was reckless in not knowing that these statements were false when made.

The false statements in Lacy’s application to Broker B were material, as a reasonable broker-dealer firm would rely on them in deciding whether to allow Lacy to open an account and trade securities. As the person who submitted the application, Lacy had ultimate authority over these false statements.

Lacy’s account at Broker B included "same day trading" instant deposit credit, allowing him to trade securities before his deposits from his banks settled into his Broker B account. Using Broker B’s online platform, Lacy linked his account to his account at Bank Y and an account with a money-transfer application ("Application") linked to an account at Bank Z.

On October 24 and 25, 2022, Lacy initiated two $100,000 deposits to his Broker B account. He knew or was reckless in not knowing that his Bank Z account lacked sufficient funds to cover these deposits. In the weeks leading up to these transactions, Lacy had used the Application to initiate approximately 20 transactions, all for amounts far less than $100,000, which were declined due to insufficient funds in his Bank Z account. When he initiated the two $100,000 deposits, his Bank Z account had a balance of $7.09. Lacy had access to this balance through the Application. Two days after each deposit, Bank Z reversed them due to insufficient funds.

By initiating $200,000 in unfunded deposits from his Bank Z account to his Broker B account, Lacy implicitly falsely represented that there were sufficient funds in the Bank Z account to cover these deposits. These false statements were material, as a reasonable broker-dealer firm would use them to decide whether to allow Lacy to maintain an account and trade securities.

Before the reversals by Bank Z, on October 25 and 26, 2022, Lacy used Broker B’s “same day trading” credit to make approximately $329,000 in securities purchases. On October 25, 2022, he initiated purchase orders for common stock in Public Company D and Public Company E and bought shares of Exchange Traded Fund A. On October 26, 2022, he initiated purchase orders for common stock in Public Company B, Public Company F, Public Company G, and Public Company H. These orders resulted in Lacy purchasing common stock in Public Company D, Public Company B, Public Company F, Public Company G, and Exchange Traded Fund A.

On October 25 and 26, 2022, Lacy sold these securities at a net profit using Broker B’s online platform. On October 25, 2022, he transferred $1,478 from his Broker B account to his account at Bank Y. As a result of Lacy’s scheme, Broker B lost $1,516.57, which includes Lacy’s $1,478 withdrawal and $48.57 in unpaid margin interest.

Lacy acted with scienter regarding his free-riding conduct at Broker B. He knowingly made false representations about his annual income, liquid net worth, and profession in his account application. Additionally, when he initiated deposits on October 24 and 25 and traded securities based on these deposits, he knew or was reckless in not knowing that his Bank Z account lacked sufficient funds. Lacy was aware of free-riding schemes before and during the Relevant Period.

Lacy’s scienter during the Relevant Period, with respect to free-riding conduct at Broker A and Broker B, is further evidenced by a series of additional unfunded deposits he made at other broker-dealer firms. Specifically, Lacy initiated unfunded deposits at Broker C in August 2022, Broker D in October 2022, Broker E in October 2022, Broker F in October 2022, Broker G in October and November 2022, and Broker H in December 2022.

C. LACY’S CONDUCT WAS IN CONNECTION WITH THE PURCHASE OR SALE OF SECURITIES

Lacy's actions, as described above, were directly related to the purchase or sale of securities. He fraudulently initiated unfunded deposits from his bank accounts to his brokerage accounts and utilized the credit provided by the broker-dealers to trade securities.

Claims For Relief

From at least October 1, 2022, to October 26, 2022 (the “Relevant Period”), Lacy engaged in fraudulent activities, including making false and misleading statements to multiple brokerage firms.

FRAUD BY DEFENDANT LACY: VIOLATIONS OF SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10B-5

By engaging in the conduct described above, Lacy, knowingly or recklessly, in connection with the purchase or sale of securities, through the use of interstate commerce or the mails, directly or indirectly:

• employed devices, schemes, or artifices to defraud;
• made untrue statements of material facts or omitted material facts necessary to make the statements made, in light of the circumstances, not misleading; and
• engaged in acts, practices, or courses of business that operated or could operate as a fraud and deceit upon the purchasers of such securities, as described in detail above.

As a result of the foregoing, Defendant Lacy has violated, and unless enjoined, will continue to violate Section 10(b) of the Exchange Act and Rule 10b-5.

Prayer For Relief

The Plaintiff respectfully requests that the Court enter a Final Judgment:

1. Finding that Defendant violated the statutes and rules detailed in this Complaint.
2. Permanently restraining and enjoining Defendant Lacy, and all persons in active concert or participation with him, from directly or indirectly violating the statutes and rules outlined in this Complaint.
3. Permanently restraining and enjoining Defendant Lacy, and all persons in active concert or participation with him, from: (a) directly or indirectly trading securities in any brokerage account he owns, controls, or has access to, unless it contains settled cash equal to or greater than the amount of the securities trade(s), and (b) opening a brokerage account without first providing the relevant brokerage firm(s) with a copy of the Commission’s filed complaint and any judgment obtained against him in this matter.
4. Ordering Defendant Lacy to disgorge all ill-gotten gains derived from his illegal conduct as described in this Complaint, along with prejudgment interest thereon, pursuant to Sections 21(d)(5) and 21(d)(7) of the Exchange Act.
5. Ordering Defendant Lacy to pay a civil monetary penalty pursuant to Section 21(d)(3) of the Exchange Act.
6. Retaining jurisdiction over this action to implement and enforce the terms of all orders and decrees that may be entered.
7. Granting such other and further relief as this Court may deem just, equitable, and appropriate in connection with the enforcement of federal securities laws.

Key Takeaways For The Investors

1. IMPORTANCE OF DUE DILIGENCE BY BROKER-DEALERS

Brokerage firms must perform thorough due diligence on new account applications to verify the accuracy of the information provided. This case highlights the risks associated with relying on unverified statements from account holders.

2. FRAUDULENT ACTIVITIES AND THEIR CONSEQUENCES

Engaging in fraudulent schemes, such as free-riding, can lead to significant legal consequences, including civil penalties, disgorgement of ill-gotten gains, and permanent injunctions against further trading activities. Investors should be aware that illegal activities are rigorously pursued by regulatory bodies like the SEC.

3. MATERIAL MISREPRESENTATIONS

Providing false information about income, net worth, or professional status can lead to severe repercussions. Investors should always provide accurate information to avoid potential legal issues.

4. REGULATORY OVERSIGHT

The SEC actively monitors and enforces compliance with securities laws. This enforcement serves to protect market integrity and investor interests. Investors can have confidence that fraudulent activities are taken seriously and acted upon.

5. RISKS OF LEVERAGING CREDIT

The use of "instant buying power" or other forms of credit for trading securities carries significant risks, particularly if the underlying funds are not available. Investors should exercise caution and ensure they have sufficient funds before engaging in leveraged trades.

6. IMPACT ON BROKERAGE FIRMS

Fraudulent activities can result in financial losses for brokerage firms. This case emphasizes the importance of robust risk management practices and internal controls within these firms to detect and prevent fraudulent transactions.

7. LEGAL AND FINANCIAL REPERCUSSIONS

Defendants in such cases can face significant financial penalties, including the disgorgement of profits and payment of civil monetary penalties. Investors should understand that fraudulent behavior not only has legal implications but also financial ones.

8. INVESTOR AWARENESS

This case serves as a reminder for investors to be vigilant and informed about the integrity and legality of their trading practices. Engaging in or turning a blind eye to fraudulent activities can have serious consequences.

By understanding these key takeaways, investors can better navigate the complexities of the securities market, maintain compliance with regulatory standards, and uphold the integrity of their investment activities.

Key Takeaways for Financial Market Practitioners and Management

1. RIGOROUS DUE DILIGENCE AND VERIFICATION

Financial institutions must implement stringent verification processes for new account applications to ensure the accuracy of the information provided by clients. This includes verifying income, net worth, and professional status to prevent fraudulent accounts from being opened.

2. ENHANCED RISK MANAGEMENT

Firms should strengthen their risk management frameworks to detect and mitigate fraudulent activities. This involves monitoring for suspicious transactions and ensuring that trading activities are backed by sufficient funds.

3. IMPORTANCE OF INTERNAL CONTROLS

Robust internal controls are essential to prevent and identify fraudulent activities. This includes implementing systems to flag unusual deposit patterns and insufficient fund transactions, as well as conducting regular audits of trading accounts.

4. LEGAL AND REGULATORY COMPLIANCE

Adhering to securities laws and regulations is crucial. Practitioners must stay informed about regulatory requirements and ensure their firms comply with them to avoid legal repercussions and maintain market integrity.

5. RESPONSIBILITY AND ACCOUNTABILITY

Management must foster a culture of responsibility and accountability within their organizations. Employees should be aware of the legal and ethical standards expected of them and understand the consequences of violating these standards.

6. CLIENT EDUCATION AND TRANSPARENCY

Financial firms should educate their clients about the risks and responsibilities associated with trading on credit. Transparency about the terms and conditions of trading accounts can help prevent misunderstandings and fraudulent behavior.

7. RESPONDING TO FRAUDULENT ACTIVITIES

In the event of fraudulent activities, firms must act swiftly to investigate and address the issues. This includes cooperating with regulatory bodies and taking corrective actions to prevent future occurrences.

8. TECHNOLOGICAL SOLUTIONS

Leveraging advanced technological solutions, such as machine learning and artificial intelligence, can enhance the detection of fraudulent activities. These tools can analyze transaction patterns and identify anomalies that might indicate fraud.

9. COLLABORATION WITH REGULATORY BODIES

Financial firms should maintain open lines of communication with regulatory bodies like the SEC. Collaboration can aid in the timely detection and resolution of fraudulent activities, ensuring a safer market environment.

10. IMPACT ON FIRM REPUTATION AND FINANCIAL HEALTH

Fraudulent activities can significantly damage a firm's reputation and financial health. Proactive measures to prevent fraud can protect the firm's reputation and maintain investor confidence.

11. CONTINUOUS TRAINING AND DEVELOPMENT

Regular training for employees on compliance, ethics, and fraud detection is essential. Continuous professional development helps staff stay updated on best practices and emerging threats in the financial industry.

By incorporating these key takeaways, financial market practitioners and management can enhance their operational integrity, protect their clients, and contribute to the overall stability and trustworthiness of the financial markets.