(Adds details throughout on case, background)
WASHINGTON, April 4 (Reuters) - U.S. securities regulators filed charges against two trading firms and five individuals on Friday in a case involving an illegal manipulative trading practice known as "spoofing."
In its case, the U.S. Securities and Exchange Commission said 37-year-old Joseph Dondero, a co-owner of a New Jersey-based trading firm called Visionary Trading LLC, routinely engaged in spoofing.
Spoofing involves rapidly placing orders to create the illusion of market demand. Unsuspecting traders are then tricked into buying or selling at artificial prices, only to later find that the orders were canceled.
"The fair and efficient functioning of the markets requires that prices of securities reflect genuine supply and demand," said Sanjay Wadhwa, a senior associate director of the SEC's New York regional office.
"Traders who pervert these natural forces by engaging in layering or some other form of manipulative trading invite close scrutiny from the SEC."
Dondero has agreed to settle the charges, pay more than $1.9 million, and be barred from the securities industry.
An attorney for Dondero could not be immediately reached.
The SEC's case comes just days after the FBI and the Commodity Futures Trading Commission each said they were looking more broadly into the practice of spoofing, as part of a wide-ranging investigation into strategies that may be deployed by high-frequency traders.
U.S. Attorney General Eric Holder also said on Friday that the Justice Department is investigating whether certain high-speed trading practices violate insider trading laws.
Market scrutiny of fast-paced electronic trading and potential manipulative practices intensified this week, after bestselling author Michael Lewis released his book "Flash Boys: A Wall Street Revolt."
In the book, Lewis alleges that the markets are rigged by high-speed traders who profit from trades made at a speed unavailable to ordinary investors.
It was not immediately clear in the SEC's charging documents whether Visionary deploys high-speed trading strategies.
In addition to charging Dondero with spoofing, the SEC charged three of Visionary's co-owners - Eugene Giaquinto, Lee Heiss, and Jason Medvin - saying they along with Dondero failed to register the firm as a brokerage as required by law.
The agency claims that the four owners also illegally received a share of their commissions from Lightspeed Trading LLC - a New York-based brokerage - that were generated from trading for Visionary's customers.
Lightspeed was charged by the SEC for allegedly ignoring red flags that Visionary and its owners were receiving the compensation even though the firm was not properly registered.
Lightspeed's former chief operating officer Andrew Actman was additionally charged with failure to supervise.
All defendants in the case agreed to settle the matter. Collectively they will pay about $3 million.
"None of my clients, Eugene Giaquinto, Lee Heiss, and Jason Medvin, were charged with layering or spoofing. It is an unfortunate situation that their registration violations got swept into this larger investigation, but my clients are glad to put it behind them and move on," said attorney Ms. Jenice Malecki of the New York-based firm Malecki Law.
Attorneys for Lightspeed and Actman could not be immediately reached.
(Reporting by Sarah N. Lynch; Editing by Karey Van Hall and Diane Craft)