What Is Stock Parking?
Stock parking is the illegal practice of selling shares to another party with the understanding that the original owner will buy them back after a short time. The goal of stock parking is to conceal a stock's real ownership while maintaining the appearance of regulatory compliance.
- Stock parking occurs when shares are purchased, but temporarily held at some third party before being placed in the end client's account.
- The purpose of stock parking is to obscure the true ownership and transaction history of those securities by soliciting an intermediary.
- Parking is illegal as it allows brokers to obviate regulatory disclosures of certain positions and transactions.
Stock Parking Explained
Stock parking is an illegal measure by which a broker arranges to sell shares to another party to reduce their position for disclosure deadlines, with the understanding that the original broker will purchase the shares back later at a profit to their receiving broker. Brokerages try to park stocks to keep their holdings clean under Securities and Exchange Commission (SEC) guidelines during disclosure periods, or to appear as though they have fulfilled all of their obligations by the settlement date for a particular trade.
Sometimes individual stockbrokers park stocks without their employer's knowledge. In these instances, the broker may have moved the shares to conform to the internal regulations of their brokerage, rather than to avoid an SEC violation. Sometimes two individual stockbrokers can collude to make their personal profits unbeknownst to either of their companies with this arrangement. Often, the broker is trying to temporarily avoid disclosing long-term holdings that they want to continue holding; this can be because their total holdings won't withstand federal scrutiny if they retain all their long-term holdings, or because their brokerage firms hold penalties for aged stocks.
Parking vs. Kiting
"Parking" is also used to describe a form of share kiting. In these cases, brokerage firms attempt to cover undeclared short positions (shares which the broker owes) whose stock was not delivered by the settlement date. Rather than performing a buy-in transaction, these firms collude with one another and, by delaying the settlement process, inflate the number of shares available for trade in the secondary market.
Stock parking represents collusion and artificial manipulation of the market. As is often the case with SEC regulations, the severity of the punishment for colluding to park shares largely depends on the severity of the infraction; the number of shares traded, the amount of taxable income unregistered and the scale of the conspiracy. Small violations can incur little more than a small fine and a ban from trading securities. Larger cases are prosecuted more severely; in a notable case in 1989, corporate raider Paul Bilzerian was convicted on nine counts of tax fraud related to a stock parking scheme and was sentenced to four years in prison and a fine of $1.5 million.