Matter of Yoshikawa

Terrance Yoshikawa (defendant) was the principal of Ko Securities, Inc. (Ko). The National Association of Securities Dealers (NASD) (plaintiff) charged Yoshikawa with violating the federal securities laws and the NASD’s rules by manipulating the prices of three publicly traded companies to obtain more than $5 million in illicit profit. Specifically, the NASD alleged that Yoshikawa engaged in auto-execution manipulation by placing small limit orders to buy or sell certain securities (initial offers), causing an improvement in the price at which others could take the opposite position as Yoshikawa (i.e., sell if Yoshikawa’s initial order was to buy and vice versa). Almost immediately after initial orders, Yoshikawa’s associate placed much larger buy or sell orders (second orders) to exploit this price improvement. Yoshikawa then withdrew the initial orders. This arrangement worked because the second orders typically would be executed automatically at the improved price set by the initial orders. Yoshikawa initially tried to explain his trading pattern by claiming he made mistakes in placing the initial offers or changed his mind after placing them. Later, however, Yoshikawa contended he placed the initial offers to test for hidden orders in the system although he did not explain why he did not utilize other methods for searching for hidden orders. Yoshikawa acknowledged that he (1) knew that the initial orders would change the price at which the second orders would be executed; (2) gave his associate advance notice of the initial orders, allowing her promptly to place the second offers; and (3) used market makers that were likely to provide automatic execution of the second offers due to industry custom and business practice (though not by law). Nevertheless, Yoshikawa argued he did not engage in market manipulation because (1) each initial and second offer was legitimate and (2) the trading platform provided automatic execution for its own business reasons that he could not control. The NASD ruled against Yoshikawa and barred him from associating with any NASD-member firm. Yoshikawa appealed to the Securities and Exchange Commission.