When $93K in Profits Trigger a Permanent Injunction

The Cost of Free-Riding: Why Pre-Trade Cash Verification Matters More Than Ever

Rey Acosta opened a brokerage account in October 2023. By early January 2024, that account held $2.00.

Then he did something remarkable—and illegal. According to the SEC’s March 2025 complaint, Acosta initiated four ACH transfers totaling $1.5 million from a bank account he knew had insufficient funds. Before those transfers bounced, he purchased three stocks worth $122,311. Same day, he sold them all. Profit: $93,565.

The kicker? He’d already been warned by another broker about free-riding.

The SEC didn’t see this as a victimless crime. Acosta consented to a permanent injunction, a $15,000 penalty, and something that’ll follow him around: any future broker must receive a copy of the complaint before opening his account. The operational version of a scarlet letter.

Why This Keeps Happening

Free-riding in cash accounts isn’t new. Regulation T—which governs credit extension by brokers—has prohibited it since 1934. The rule’s simple: you can’t buy securities without paying for them. Do it once, freeze the account for 90 days. Do it repeatedly, and you’re looking at enforcement action.

So why does it still happen? Speed.

T+1 settlement compressed timelines. What once took three days now happens in one. Retail investors expect instant execution. They initiate ACH transfers—which can take days to clear—and assume they can trade immediately. Some brokers extend provisional credits to facilitate this, trying to balance customer experience with regulatory requirements.

That’s the opening Acosta exploited. He didn’t wait for funds to clear. He traded on money that didn’t exist, captured profits, and left before the music stopped.

Where the Controls Often Break

The operational challenge: verifying funds before trading without killing the customer experience.

Here’s the typical pattern. Customer initiates deposit. System shows pending balance. Representative sees available-to-trade amount and routes the order. Trade executes. Days later, the ACH bounces. By then, positions might be sold, profits might be withdrawn, and the firm’s stuck unwinding a transaction that never should’ve happened.

Manual verification doesn’t scale. Calling the custodian-of-record for every cash account trade? That creates latency customers won’t tolerate and operations teams can’t sustain. Spreadsheets tracking provisional credits and deposit status? One missed update and you’ve got exposure.

The problem compounds at firms with multiple clearing relationships. Different custodians, different response formats, different timelines. Operations teams spend hours chasing confirmations, trying to match responses to pending orders, and hoping they catch problems before settlement.

The Regulatory Framework

Regulation T’s free-riding prohibition is absolute. No exceptions for small accounts, first-time traders, or firms trying to compete on customer experience. The 90-day freeze applies regardless of intent. Repeat violations escalate to enforcement.

SEC Rule 17a-4 requires firms to maintain records of all trades, communications, and supervisory reviews. When an examination team asks “How do you verify funds before trading?”—and they will—the answer can’t be “We mostly catch it.”

The standard isn’t reasonable best efforts. It’s demonstrable controls that actually prevent free-riding. Provisional credits are acceptable if—and only if—the firm can prove it verified the underlying funds exist. “We extended credit and hoped the deposit cleared” doesn’t meet the standard.

The T+1 Reality

T+1 made this harder. The margin for error between deposit and execution shrunk. Controls that sufficed at T+2 crack under compressed timelines. Firms that relied on multi-day windows to verify funds now face same-day pressures.

Customers don’t care about settlement cycles. They see cash in their bank, initiate a transfer, and expect to trade. The operational burden—verifying that cash actually exists and is available—falls entirely on the broker-dealer.

This creates tension. Customer service wants instant execution. Operations wants verification. Compliance wants audit trails. Everyone’s right, and the firm that doesn’t solve this systematically is operating with exposure.

How Automation Changes the Equation

Pre-trade verification beats post-trade remediation. Always.

FVD (Freefunds Verified Direct) streamlines communication between executing brokers and custodians to verify free cash balances before trades execute. Not after. Before.

Real-time or near-real-time verification means the system confirms available funds exist prior to order routing. No provisional credits based on hope. No manual calls creating latency. No 90-day freezes because someone missed a detail.

The workflow’s straightforward: customer initiates order, system checks with custodian-of-record, receives confirmation, routes trade. Structured exception handling manages edge cases without stopping legitimate trades. Audit trails show exactly what was verified, when, and by whom—critical for Rule 17a-4 compliance and examination readiness.

Integration with PBIN matters here too. When an F1SA is on file showing prime brokerage arrangements, FVD automatically suppresses outgoing Letter of Free Funds requests. No unnecessary verifications. No wasted operational effort. Just clean, efficient processing.

The Systematic Approach

Controls that prevent free-riding share common elements:

Verification first: Confirm funds exist before allowing trades. Not provisional credits. Actual verification.

Automated workflows: Manual processes fail under volume. Purpose-built systems handle scale while maintaining controls.

Audit trails: Every verification creates an immutable record. When examiners ask what you verified, you show them exactly what happened.

Exception routing: Edge cases exist. Structured workflows handle them without creating gaps in controls.

Firms that nail this don’t just avoid violations. They reduce operational costs. Pre-trade verification eliminates the expense of unwinding bad trades, investigating violations, and managing account freezes. The system catches problems before they become problems.

Practical Takeaways

Acosta’s $93,565 in profits cost him a permanent injunction and future operational friction. More broadly, his case illustrates what happens when firms can’t demonstrate effective pre-trade controls.

Operations managers should ask:

• Can we verify cash balances before routing orders?
• Do our provisional credit policies actually confirm underlying funds?
• When examiners review our controls, what evidence do we show?
• How much time do we spend unwinding trades that shouldn’t have executed?

The answer to that last question is expensive. Reactive compliance—catching violations after they occur—costs more than proactive controls. Prevention beats remediation. Every single time.

The Broader Pattern

Free-riding cases aren’t isolated incidents. They’re symptoms of control gaps that scale hides until an examination or enforcement action forces visibility.

Loffa Interactive Group has spent more than 20 years helping broker-dealers implement controls that actually work. We’ve passed rigorous vendor reviews at major Wall Street institutions. We understand operations because we’ve built solutions operators use daily.

Pre-trade verification isn’t theoretical. It’s operational infrastructure that prevents violations, reduces costs, and creates the audit-ready evidence examiners expect. The time to fix this isn’t during an investigation. It’s before the first problematic trade executes.

This post is for informational purposes only and does not constitute legal advice. For guidance on specific regulatory obligations, consult your counsel or compliance advisor.