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Apple Inc. : 3RD UPDATE : Former Rochdale Trader Arrested, Charged for Wire Fraud

12/04/2012 | 06:54pm US/Eastern
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(Updates with background and details throughout)

By Alexandra Scaggs and Ben Fox Rubin

Former Rochdale Securities LLC trader David Miller was charged Tuesday by the U.S. attorney's office with wire fraud for an alleged unauthorized trade in Apple Inc. (AAPL) shares that left the brokerage scrambling for a rescue.

The former trader, Mr. Miller, 40 years old, of Rockville Centre, N.Y., allegedly arranged a purchase of about $1 billion worth of Apple stock in a scheme that backfired when the company's stock fell after disappointing earnings, according to a criminal complaint from the U.S. Attorney for the District of Connecticut. The firm lost about $5 million as a result, the complaint said, which was more than it had in capital.

Mr. Miller's lawyer, Kenneth Murphy of Simon & Partners LP, declined to comment.

Stamford, Conn.-based Rochdale, best known for employing bank analyst Richard Bove, has been looking for a rescuer to shore up its balance sheet since the Oct. 25 trade left it in what President Daniel Crowley called "a negative capital position." As of the end of 2011, the firm had $3.4 million in capital, according to a filing with the Securities and Exchange Commission.

Mr. Miller surrendered to the Federal Bureau of Investigation on Tuesday in Bridgeport, Conn., and was later released on a $300,000 bond. An FBI spokesman said the bureau had no further comment.

Mr. Crowley declined to comment on the charges Tuesday. He has said Rochdale is in talks with multiple firms about a potential buyout or capital infusion. Mr. Bove said last week he would remain with the firm "until the last shot is fired."

Mr. Miller, who the criminal complaint described as a "marginally profitable trader," allegedly schemed to defraud Rochdale by buying 1.625 million shares of stock in Apple on the day the tech firm was scheduled to announce its quarterly earnings. The scheme was designed so that Mr. Miller would profit if the stock price rose after Apple announced its earnings, the complaint said.

But Apple's earnings missed Wall Street expectations and shares fell 0.9% the following day. An Apple spokeswoman said last month the company doesn't comment on trading in its shares.

Mr. Miller told Rochdale he was executing a customer order, but the "scheme was designed so that Rochdale...would bear the risk of loss if Apple's stock price dropped," the complaint said. When the stock price declined after the earnings report, Rochdale's customer said it had only ordered 1,625 shares of Apple, according to the complaint. Mr. Miller said he had made a mistake in ordering many multiples of what was written in a client's order, according to the complaint.

Mr. Miller also allegedly told a second brokerage, which wasn't named in court papers, that he worked for a third firm and told the brokerage to contact what the complaint described as "non-existent persons" at the third firm to open accounts.

Mr. Miller put in a trade shorting Apple shares--or selling stock he didn't own--through the second brokerage, allegedly on the third firm's behalf. Investors who sell stock short hope the share price declines and aim to profit later by buying stock back at a cheaper price.

After the short trade was executed, the second brokerage tried to contact the names provided at the third firm but "learned no one by those names worked there," the complaint said.

As a result, the second brokerage was allegedly left with a short position of about 500,000 shares of Apple. The brokerage was able to trade out of the position at a profit when Apple shares fell, according to the complaint.

The chief financial officer of the third firm told the FBI agent investigating the incident that Mr. Miller "did not work for [the firm], did not have a job offer with [the firm], and was never authorized to trade on its behalf." He also said the contact names provided were "phony."

Rochdale has been unable to trade securities or issue stock research since shortly after the billion-dollar trade, because of its cash shortfall. During the weeks in which Mr. Crowley has sought aid for the firm, its trading ranks have thinned.

Traders would be particularly hard-hit by the restrictions, as much of their income is made on commission. According to data from the Financial Industry Regulatory Authority, at least 14 Rochdale employees have deregistered with the firm since the unauthorized trade, including the co-heads of its trading operations.

Write to Alexandra Scaggs at alexandra.scaggs@dowjones.com and Ben Fox Rubin at ben.rubin@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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