Local businesses owner and employee each plead guilty to filing false tax returns after failing to report nearly $4 million in income
ATLANTA – Mark Melnick has pleaded guilty to a criminal information charging him with conspiracy to commit wire and securities fraud arising from a years-long scheme to manipulate the prices of short-term call options in large, publicly traded companies. Melnick is the second defendant to plead guilty for his participation in this scheme. In December 2020, Bart Ross also pleaded guilty to conspiracy to commit wire and securities fraud.
“Melnick and others involved in this scheme profited not because of their financial acumen, but simply by cheating,” said Acting U.S. Attorney Kurt R Erskine. “We will prosecute all forms of securities fraud, whether it involves defrauding investors, insider trading, pump-and-dump schemes, or the type of sophisticated market manipulation at issue here.”
“Fraudulently manipulating securities may seem like a harmless crime, but there are real victims and their lives changed because of it,” said Chris Hacker, Special Agent in Charge of FBI Atlanta. “The FBI is committed to working with our law enforcement partners to stop greed driven traders like Melnick from profiting illegally.”
According to Acting U.S. Attorney Erskine, the charges and other information presented in court: Between approximately October 2017 and January 2020, Melnick, Ross, and at least three other individuals, conspired to execute a scheme in which they traded securities—primarily short-term call options—in large, publicly traded companies (often Fortune 500 companies) based on materially false rumors about those companies that they generated and disseminated. These materially false rumors were intended to drive up the price of the securities (both the underlying stock and options).
Call options are essentially a contract that gives the options’ holder the right, but not the obligation, to buy shares of the underlying stock at a set price per share—the option’s strike price—on or before a set future date (the option’s expiration date). Generally, the holder of a call option benefits when the price of the underlying stock increases. Short-term call options are ones that generally expire within a week.
Ross, who was formerly a registered broker with FINRA, and the co-conspirators generated the rumors. The conspirators would often refine a proposed rumor by exchanging drafts among themselves using the Trillian instant messaging application. Melnick was a day trader and T3 Live Senior Trading Strategist. Melnick often provided a “technical evaluation” on whether a particular false rumor would be successful. After a rumor was formulated and finalized, one of the co-conspirators, identified as Individual-1 in the criminal information, was responsible for disseminating the rumor via Trillian to multiple accounts, which would in turn result in the false rumor being disseminated over one or more market subscription services, including Trade The News, TradeXchange, and Benzinga, as well as various Twitter accounts.
Before Individual-1 disseminated the rumor, Melnick, Ross, and the other co-conspirators would acquire a position in the publicly traded company that was the subject of the materially false rumor. The co-conspirators typically purchased short-term call options before (sometimes just minutes or seconds before) Individual-1 disseminated the rumor. The conspirators often (but not always) purchased short-term call options because the price of such options is more sensitive than the price of the underlying stock. It was therefore possible for Melnick and the others to earn a greater percentage return by trading short-term call options rather than the underlying stock. Melnick and the conspirators profited from their scheme by selling the options (or other securities) after they increased in price. They would typically sell off their positions shortly after the rumor was disseminated (and after the price of the option or underlying stock had increased). Melnick also had an agreement with Individual-1 to share a portion of his profits from the scheme with Individual-1.
Melnick executed at least 102 trades based on the generation and dissemination of false rumors, including in March and April 2018, when Ross traded short-term call options in Disney and Ben Franklin Resources, respectively. Overall, Melnick earned approximately $374,000 in profits from the scheme.
Mark Melnick, 41, of Marlboro, New Jersey, is scheduled to be sentenced December 16, 2021, at 9:30 a.m. before U.S. District Judge Leigh Martin May.
This case is being investigated by the Federal Bureau of Investigation with assistance from the Securities and Exchange Commission.
Assistant U.S. Attorneys Alex R. Sistla and Thomas J. Krepp are prosecuting the case.
The SEC is investigating potential civil violations of the U.S. securities laws relating to above-described scheme. In connection with its investigation, the SEC filed a separate civil enforcement action and consent judgment against Melnick in the U.S. District Court for the Northern District of Georgia.
For further information please contact the U.S. Attorney’s Public Affairs Office at USAGAN.PressEmails@usdoj.gov or (404) 581-6016. The Internet address for the U.S. Attorney’s Office for the Northern District of Georgia is http://www.justice.gov/usao-ndga.