Manhattan District Attorney Cyrus R. Vance, Jr., today announced the indictment of SCOTT KUPERSMITH, 46, and five of his shell companies, for conducting what is known in the financial markets as a “free-riding” scheme. Through this scheme, KUPERSMITH conducted more than $60 million worth of illegal stock trades, causing at least six broker-dealers to suffer a combined loss of more than $830,000. KUPERSMITH and his five shell companies, ANTIBE ARBITRAGE GROUP, INC., ATLANTIC SOUTHERN CAPITAL GROUP, INC., FULLERTON CAPITAL GROUP, INC., NORTHBRAE CAPITAL GROUP, INC., and OXFORD SMITH ADVISORS, LLC, are charged with Grand Larceny in the First and Second Degrees, Scheme to Defraud in the First Degree, and violations of the Martin Act, New York State’s securities fraud law. This investigation was conducted parallel to investigations by the United States Attorney’s Office for the District of New Jersey and the United States Securities and Exchange Commission into similar unlawful conduct that KUPERSMITH is accused of perpetrating against other broker-dealers.
“Financial markets are governed by rules that keep investors safe. This defendant, skilled in the technicalities of market function and bank operations, came up with a clever scheme to create risk-free investments,” said District Attorney Vance. “The illegal scheme he is accused of was little more than a confidence game using offshore banks, shell companies, and fraud, and ultimately cost legitimate broker-dealers hundreds of thousands of dollars.”
U.S. Attorney for the District of New Jersey Paul J. Fishman said: “According to the Complaint, Scott Kupersmith managed to defraud both investors and brokerage firms of least a million dollars by making trades he couldn’t pay for and promises he couldn’t keep. ‘Free riders’ and Ponzi schemers who live large on others’ money do so on borrowed time.”
Under Securities and Exchange Commission rules, a purchaser of securities must have the assets, or at least the buying power to complete the purchase, available at the time the order is placed. Purchasers have three days before they must pay for, or “settle,” these stock purchases. In an illegal “free-riding” scheme, a customer – knowing that he or she does not have the funds to cover the purchase price – places an order with a broker-dealer to purchase stock. Shortly thereafter, anticipating that the price will rise in the short term, the customer places an order to sell the stock at a different broker-dealer, and uses the proceeds of that sale to cover the initial purchase. The goal is to obtain a risk-free profit from short-term changes in the price of a particular security. If the price of the security goes up, the defendant completes the deal and pockets the profit. However, if the price of the security falls, the purchaser walks away, leaving the broker-dealer holding the loss.
According to documents filed in court, KUPERSMITH used borrowed or assumed identities to create shell companies, and then used the shell companies to open accounts at off-shore banks that were cleared through a reputable United States financial institution. KUPERSMITH then opened “Delivery-vs.-Payment” (DVP) trading accounts, typically intended for institutional investors such as hedge funds, in the names of these companies and at several different broker-dealers, including Morgan Keegan & Co., Inc., William Blair & Co. Inc., JP Morgan Securities LLC, Barclays Capital Inc., Janney Montgomery Scott LLC, Lazard Capital Markets LLC, Cantor Fitzgerald & Co., and Morgan Joseph TriArtisan LLC.
From as early as 2008 through 2010, KUPERSMITH is accused of opening trading accounts at more than 36 different broker-dealers, often with corporate accounts in the names of multiple shell companies at the same broker-dealer, while concealing from the broker-dealer his beneficial ownership and control of the shell companies. In many cases, KUPERSMITH used mail drops and virtual offices in the New York City area as his fictitious corporate addresses to misrepresent to broker-dealers that he had legitimate New York offices. Equally important, as a part of his scheme, KUPERSMITH misrepresented to broker-dealers that the shell companies were well-financed and maintained assets at a reputable United States financial institution, when in fact they did not have a direct relationship with that institution. In reality, KUPERSMITH took advantage of the accounts and the clearing services that the off-shore banks maintained with the United States institution.
From July 2009 through September 2010, KUPERSMITH used these accounts to purchase approximately $64 million worth of publicly-traded securities with the knowledge that he did not have sufficient funds to pay for them. His objective was that over the course of those three days, the stock price would rise and he would sell the stock through a different broker-dealer, paying for his initial purchase with the proceeds of that sale, and making an illicit profit. In fact, KUPERSMITH made more than $1.2 million through this illegal trading.
On several occasions, KUPERSMITH, through his shell companies, refused to take delivery of a security for which he had placed an order when the value of that security had dropped or the trade turned out to be unprofitable. As a result, the executing broker, who had purchased the security on the market at KUPERSMITH’s direction, was left holding the security and the loss associated with the unprofitable trade. On other occasions, KUPERSMITH, through his shell companies, failed to provide delivery of securities for which he had placed an order to sell. As a result, the executing broker was left having to provide the security at a loss to cover the sale. As a result of KUPERSMITH’s actions, the broker-dealers lost more than $830,000.
Assistant District Attorneys Elson Ho and Kim Han are handling the prosecution of this case, under the supervision of Major Economic Crimes Bureau Chief Richard Weber and Deputy Bureau Chief Polly Greenberg, and Chief of the Investigation Division Adam Kaufmann. ADAs Ho and Han were assisted in the investigation by Financial Intelligence Director Margaret Abensur, former Trial Preparation Assistants Jacob Lieberman and Johanna Zacarias, Trial Preparation Assistant James MacFadyen, Investigator Karen Kelly, and Supervising Investigator Santiago Batista, under the supervision of Chief Investigator John Bilich, all members of the New York County District Attorney’s Office.
SCOTT I. KUPERSMITH, D.O.B. 4/20/1965
ANTIBE ARBITRAGE GROUP, INC.
New York, NY
ATLANTIC SOUTHERN CAPITAL GROUP, INC.
FULLERTON CAPITAL GROUP, INC.
Fort Lee, NJ
NORTHBRAE CAPITAL GROUP, INC.
New York, NY
OXFORD SMITH ADVISORS, LLC.
• Grand Larceny in the First Degree, a class B felony, 7 counts
• Grand Larceny in the Second Degree, a class C Felony, 1 count
• Scheme to Defraud in the First Degree, a class E felony, 1 count
• Violation of General Business Law, a class E felony, 9 counts
 The charges contained in the indictment are merely allegations, and the defendants are presumed innocent unless and until proven guilty.