- Shareholder XDOOD LLC filed a derivative suit accusing Interactive Brokers and Morgan Stanley of a five-year scheme using wash sales, spoofing, and high-frequency trades to depress Eltek's stock.
- The alleged manipulation harmed Eltek's capital raising and market cap, prompting claims for damages and highlighting regulatory supervision failures in microcap trading.
In a fresh blow to Wall Street’s reputation for oversight, a shareholder has launched a derivative lawsuit against two prominent brokerage firms, claiming they played a key role in a years-long scheme to manipulate the stock price of Eltek Ltd., an Israeli manufacturer of printed circuit boards.
The suit, filed just last week, paints a picture of deliberate interference that kept the company’s shares undervalued, hurting its ability to raise capital and grow.
This comes as regulators continue to crack down on securities violations, with similar cases highlighting ongoing issues in market supervision.
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The complaint was lodged on October 15, 2025, in the U.S. District Court for the Southern District of New York by XDOOD LLC, a Massachusetts-based entity acting on behalf of Eltek Ltd. and its lawful shareholders.
Michael McGauley, XDOOD’s manager and sole member, has been a continuous holder of Eltek shares since November 2019, with holdings ranging from 3,500 to 24,000 shares during that time.
The defendants include Interactive Brokers Group Inc., Morgan Stanley Smith Barney LLC (operating under the E*TRADE brand following its 2020 acquisition), and unnamed “John Does” 1-10, which could encompass other broker-dealers or entities involved in the trades.
Details of the Manipulation
At the heart of the allegations is a complex manipulation scheme spanning roughly five years, from around 2019 to the present, that artificially depressed Eltek’s stock price on Nasdaq, where it trades under the ticker ELTK.
Eltek, founded in 1970 and publicly traded since 1997, specializes in high-end printed circuit boards for industries like aerospace, defense, and medical devices, serving big names such as Boeing, Airbus, and Siemens.
Despite solid financials— including profitability since 2019, growing shareholder equity from about $1.1 million to $41.2 million by the end of 2024, and dividend payouts—the company’s shares were allegedly kept “irrationally depressed” through tactics like wash sales, matched orders, layering, spoofing, and high-frequency trading bursts.
The suit details how unidentified investors, using platforms provided by the defendant brokers, exploited Eltek’s low trading volume and small public float (the portion of shares available for trading, which fluctuated between 25% and 49% of outstanding shares).
For instance, on October 16, 2020, trading volume spiked to 972,000 shares—about 67% of the float at the time—amid suspicious activity.
Other periods saw extreme lows, with over a dozen days between April 2022 and May 2023 recording under 100 shares traded, some even listed as N/A by Nasdaq.
These manipulations, the complaint argues, distorted natural supply and demand, leading to wild price swings where small trades could shift the entire market cap by hundreds of thousands or millions of dollars.
This cry has been echoed by several investing communities, including those in GameStop and AMC Entertainment.
Morgan Stanley’s Response After Detecting Fraud
Morgan Stanley Smith Barney comes under particular fire for its response after detecting the fraud.
In October 2020, its Fraud Operations Unit confirmed manipulative activity but then imposed a “phone trade policy” that suspended electronic purchases of Eltek shares for about nine months, from October 17, 2020, to July 2021.
This required investors to place orders by phone, which the suit claims stifled demand and caused reputational damage to Eltek.
Meanwhile, the firm allegedly continued to allow short selling, creating artificial downward pressure.
The complaint notes that other brokers, like Fidelity, did not engage in similar lending practices.
Interactive Brokers is accused of providing low margins and favorable rates for shorting, using its automated systems to facilitate the scheme without adequate checks.
The fallout for Eltek was significant: suppressed stock prices forced it to raise capital at undervalued rates, limiting expansion, acquisitions, and competitiveness, per a Law360 report.
The company’s market cap dipped as low as $3.14 million and peaked at $132.4 million during the period, with price-to-earnings ratios often below 5—far under the Nasdaq average of 22 to 45 or more.
This made it ineligible for many institutional investors and even risked delisting threats.
Regulators Were Flagged and Nothing Was Done About It
The suit seeks actual damages, treble damages under securities laws, punitive damages, and an injunction to halt further manipulation.
XDOOD’s pursuit stems from a demand made to Eltek’s board on September 22, 2025, under Israeli law, which the company declined to act on directly but authorized the plaintiff to proceed.
McGauley had previously flagged issues to regulators, filing SEC whistleblower reports in 2020 and 2021, and even suing E*TRADE (now part of Morgan Stanley) in 2021 to uncover trading details.
That earlier case revealed McGauley’s over-5% stake in Eltek, yet the broker allegedly retaliated by terminating his account.
This lawsuit echoes broader concerns about market integrity, especially in thinly traded stocks.
For example, just last month, Goldman Sachs and Morgan Stanley successfully fended off claims from investors tied to the 2021 Archegos Capital Management collapse, where the banks were accused of dumping billions in stocks after gaining insider knowledge of Archegos’ liquidity crisis.
In that case, filed in New York, the firms defeated seven lawsuits alleging they prioritized their own interests over clients.
A History of Violations
Morgan Stanley has faced other recent scrutiny.
In December 2024, the SEC fined its Smith Barney unit for failing to supervise investment advisers who recommended unsuitable wrap fee accounts, leading to excessive fees for clients.
Earlier, in June 2024, a class-action suit accused the firm of breaching fiduciary duties by offering low interest rates on cash sweep accounts, violating Regulation Best Interest.
And back in 2023, victims of a Ponzi scheme run by a former Morgan Stanley advisor pushed for the firm to be held accountable for inadequate supervision, filing arbitration claims over the advisor’s misuse of client funds.
Brokers isn’t immune either. In September 2023, the SEC and CFTC hit it with $55 million in fines for recordkeeping failures, including the use of unapproved communication channels like WhatsApp.
These incidents underscore a pattern of regulatory lapses that critics say enable manipulative practices in fragmented markets.
As this case unfolds, it could shine a light on how brokers handle suspicious activity in microcap stocks, potentially prompting tighter controls.
Eltek, meanwhile, continues to operate amid these distractions, with its latest financials showing resilience despite the alleged headwinds.
Neither Interactive Brokers nor Morgan Stanley has publicly commented on the suit yet, but legal experts expect a vigorous defense given the high stakes.
Retail investors on the other hand, have seen this story play out many times without justice.
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