Editor’s Note: Brea-based Mullen Automotive Inc., a maker of electric vehicles (Nasdaq: MULN), has accused stock traders of using “spoofing” algorithms to profit from its falling shares. Since the company went public in 2021, its shares have dropped more than 99% and its market cap hovers around $60 million.
“In the 21 years our team has been prosecuting market manipulation cases against Wall Street, I believe this could be one of the largest and strongest spoofing and market manipulation cases we have handled. … I believe the damage model could be in the billions of dollars,” Wes Christian of Christian Attar Group, which is handling the case along with Warshaw Burstein LLP, said in a statement. What follows is an edited version of Mullen’s 41-page complaint filed on Dec. 6 asking for a jury trial in the U.S. District Court for the Southern District of New York against IMC Financial Markets, Clear Street Markets LLC, UBS Securities LLC and John Does 1 through 10.
The case arises from defendants’ use of “spoofing,” an unlawful trading device that they utilized to manipulate the market price of Mullen’s shares between Nov. 9, 2021 and Nov. 9, 2023.
The Securities and Exchange Commission has called spoofing a “harmful strategy” employed by some high frequency traders that is carried out by “strategically placing orders to create the impression of substantial order book imbalances in order to manipulate subsequent prices.”
During the relevant period, defendants placed thousands of spoofing orders to sell to create the illusion that the share price of Mullen was declining. These orders were intended to “trick” or “bait” other investors into selling their shares which further drove Mullen’s share price downward.
Mullen relied on the reasonable assumption that the Nasdaq Stock Market was an efficient market that was not being manipulated when it sold over 5 billion shares at prices—which Mullen has since learned were artificially depressed due to defendants’ spoofing—causing Mullen to suffer hundreds of millions of dollars, if not more, in losses.
Defendants John Does 1 through 10 are entities—including but not limited to market makers, broker-dealers, subsidiaries, affiliates, and sister companies of the defendants, and defendants’ customers—whose identities are currently unknown.
Buy Low, Sell High
Typically, a trader buys when he or she thinks the price of a security is likely to go higher and sells when they think the price of a security will go lower. However, one of the clear signs of manipulative spoofing is a rapid reversal of trading direction—for example, where a market participant places many sell orders, followed by a buy order, followed by the cancellation of the sell orders.
This type of behavior strongly suggests that the original sell orders were not intended to be executed, and instead, were merely a ploy to drive the price downwards to “buy low.”
- Defendants’ spoofing schemes were accomplished through the following three steps:
Defendants flooded the Limit Order Book of Nasdaq with large quantities of Baiting Orders to sell. The sole purpose for the placement of these Baiting Orders to sell was to deceive and mislead other market participants into believing that the market price of Mullen securities was moving downward based on the natural forces of supply and demand. - Almost simultaneously, when the Baiting Orders were being placed in the Limit Order Book, defendants also placed their executing orders on the opposite side of the Limit Order Book to purchase Mullen shares at the lower stock prices created by the downward manipulation of their baiting orders to sell.
- Immediately after the completion of their executing orders to buy Mullen shares at the lower prices, defendants canceled and removed all of their Baiting Orders to sell from the Limit Order Books.
The three stages of defendants’ spoofing cycles—which collectively make up a “Spoofing Episode”—were completed sometimes within nano- or milliseconds and were repeated multiple times a day and continuously throughout the relevant period.
This activity was intended to send a false and misleading pricing signal to the market in order to “trick or bait” market participants into executing their own sell orders. This operated as a fraud on the market and created a “pile-on” effect which drove down Mullen’s share price even further, thereby enabling defendants to purchase Mullen’s shares at artificially manipulated lower prices for either their customers’ accounts or their own proprietary accounts.
Sell-Side Imbalances
Defendants submitted fictitious Baiting Orders totaling 470,931,814 shares on Nasdaq. Defendants’ Baiting Orders led to substantial sell-side imbalances in defendants’ order flow, which were intended to and did send false and misleading pricing signals to the marketplace that interfered with Mullen’s share price being determined by the natural forces of supply and demand.
Almost simultaneously, defendants purchased a total of 2,777,294 shares at these depressed prices below the prevailing best offer prior to entry of the Baiting Orders.
Over the course of each Spoofing Episode, the Baiting Orders successfully induced the entry of sell orders from other market participants, driving down the price of Mullen shares by an average of 1.09% per episode.
For example, UBS had 431 million shares in “baiting order” while purchasing 689,621 shares, resulting in a 1.76% decline.
Each defendant knowingly or recklessly participated in spoofing schemes that were intended to—and in fact did—deceive, manipulate or defraud the market for Mullen shares and participants in that market.
Each defendant’s trading activities were approved by corporate officials sufficiently knowledgeable about the trading practices of each defendant such that each defendant knew or recklessly ignored that they were engaging in illegal spoofing.
During the relevant period, Mullen sold or issued for value over 5 billion Mullen shares. Many of the defendants’ spoofing episodes occurred immediately prior to Mullen’s sales or issuances.
During the relevant period, the Spoofing Events that could be identified in deanonymized data currently available to Mullen occurred on 359 out of 504—or 71%—of trading days.
The manipulative process and spoofing require that the true intent of the spoofer be hidden from the market. If other market participants knew that the Baiting Orders were not bona fide orders—but instead entered solely to induce other traders to move the price of the stock—those other traders would naturally ignore the Baiting Orders when making trading decisions.
The harm to Mullen is significant.
It is likely that Mullen will succeed on the merits in this case. All evidence to be presented, including trading records and defendants’ own trading algorithms, will support the position that defendants were manipulating the Mullen share price through spoofing.
As such, this Court should enter a permanent injunction enjoining defendants from engaging in spoofing activities and any other illegal manipulative conduct that affects the Mullen share price.
