An alleged market fraud by a Kuwaiti financier — who was later found dead — received a good deal of attention in the press last week, including articles in the New York Times among others. But this Reuters article offers something the others did not: a look behind the scenes at how the alleged scheme was uncovered, and how NYSE Regulation and the Securities and Exchange Commission moved quickly to halt it.

Excerpt:

Early on July 20, an individual investor called to tell regulators at the exchange he had purchased shares of Harman International Industries Inc on news reports it was the target of a takeover — reports on some smaller websites that the caller was starting to question.

NYSE Regulation, the oversight body that provided this account, said the tip reinforced suspicions about trading activity that in-house surveillance tools were picking up related to Harman shares, which jumped at least 33 percent before markets opened that Monday morning.
NYSE’s market police then scoured news on the listed company, and called it when the source of the takeover report was not immediately clear. The company knew nothing about such reports, and, just before U.S. markets opened, issued a public statement saying so.

With financial markets digesting the statement — and mainstream media starting to connect the dots to unusual faxes some outlets received on the weekend — NYSE Regulation contacted the U.S. Securities and Exchange Commission to help it identify where the market-moving news came from.

In an interview, NYSE Regulation said it then checked the tape for recent trading in Harman shares, and quickly identified a short list of brokerages that made large purchases, and sold the shares at handsome profits on Monday.

“This was a good old rumor manipulation case,” said John Malitzis, executive vice president of market surveillance at the arms-length oversight body. “Somebody issues an unsubstantiated rumor … and does so in order to benefit from the impact that that rumor will have on the stock price.”

Staff “did some quick and dirty detective work, closely with the Commission’s enforcement staff, to address the potential fraud here,” he told Reuters.

The rest is a tale of fast followup to interrupt the scheme before the trades settled and ill-gotten profits could disappear. Here is the SEC’s announcement of the case, which is still ongoing.

PS — The Reuters piece today was picked up by the Times’ DealBook blog.