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Day Trader Sentenced For Defrauding Merrill Lynch, Investor

Sonia Chopra

Day trading was one of the most discussed topics across America last week in the aftermath of the shooting rampage at two brokerage firms by a disturbed day trader. While the stories focussed on the risky business of day trading, in a Chicago court last weekend a judge sentenced a day trader to 42 months in a federal prison for defrauding an investor and the company Merrill Lynch, Pierce, Fenner & Smith of $ 785,000.

Surya Prasad L Davuluri, 32, was sentenced by federal Judge Philip Reinhart in the Rockford branch of the US District Court after his conviction in May for bilking an unidentified investor and Merrill Lynch in a commodity futures trading scam, said Assistant US Attorney Scott Verseman.

The court also stipulated that Davuluri must pay full restitution and serve three years probation, after he serves 42 months in a federal prison. After his release, he will be turned over to the Immigration and Naturalization Services and may be deported to India, Verseman said.

Davuluri, who frequented the brokerage firm in Rockford, persuaded a Crystal Lake resident to invest $ 50,000, convincing him that all he could lose would be $ 5,000. Using that amount, he opened an account at the firm's Detroit office on February 14, 1995 under the investor's name, who wishes to stay anonymous.

But within three weeks, the losses grew to more than $ 785,000 and the account was closed. Davuluri had speculated on Japanese yen contracts, hoping that it would fall down but it skyrocketed. He was able to trade by giving the company the impression that he was the investor, Verseman said.

"He was convincing. He kept telling the investor, 'things are going great, things are going fine,' and the guy saw no reason to disbelieve. Initially, things were going good and since the account was in the investor's name, he showed him some earlier statements which had gains," said Verseman, pointing out that commodity futures trading is "very risky" but "if things go well, the profits can be enormous."

A Rockford jury convicted Davuluri on May 7, of wire fraud, interstate carrier fraud and interstate transportation of a check obtained by fraud.

A trader at the Merrill Lynch office in Rockford would only say that he, like others in the company, had heard of the "incident" but referred all calls to the company's headquarters in Princeton, NJ because "this is a small, itsy-bitsy office and we are not equipped to handle such inquiries." The public relations office, based in Manhattan, declined to comment.

"This case was based on lies. The defendant lied to the investor, lied to the company and ignored the risk, repeated often in notices from the company, did not show these to the investor and continued to lie, until the investor was suspicious," Verseman said.

Calls to Davuluri's attorney were not immediately returned. A skeletal image of Davuluri's career has emerged with no family members here to provide details. He worked out of his apartment and spent his days conducting trading and has no assets, which could be used to pay back the investor and Merrill Lynch.

In a private civil matter in a National Association of Security Dealers, mediating between the company and the investor, it was decided that the company would assume losses for $ 280,000 and the investor for $ 505,000, as a result of Davuluri's action.

"This was an extremely difficult case to prosecute. It was technical and before we could even talk about the case...we had to explain the whole deal with commodity futures trading and how risky it can be," Verseman said.

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