Insider trading is the key topic this Thanksgiving week
with the revelation of a wide ranging probe by the U.S. Attorney's Office in
the Southern District of New York and the SEC. As part of the investigation,
three hedge funds were raided, charges were brought against one person in an
expert network and other investment funds received inquiries.
This week SEC enforcement brought more investment fund
cases while settling a high profile options backdating case. Criminal
prosecutors also brought an investment fund case, secured a conviction in a an
action involving the theft of high frequency trading computer code and lost an
insider trading case at trial. New York state officials obtained a key guilty
plea in their on-going "pay to play" investigation.
The SEC issued three sets of proposed Rules under
Dodd-Frank this week:
The "blue collar" insider trading probes
Insider trading involving hedge funds and their expert
advisers is the focus of a probe by the U.S. Attorneys Office for the Southern
District of New York, the FBI and the SEC (here). Search warrants were
executed at the offices of three hedge funds, Level Global Investors LP,
Diamondback Capital Management LLC and Loch Capital Management. Other
investment funds have acknowledged receiving inquiries or requests for
information, including SAC Capital, Janus Capital Group, Inc., Citadel LLC and
Wellington Management Co.
Wednesday Don Ching Trang Chu became the first person arrested and charged
since these investigations became public. Mr. Chu is an employee of an
unidentified expert networking firm. He has been charged with one count of
conspiracy to commit securities fraud and one count of conspiracy to commit
wire fraud. According to the papers filed in the Southern District of New York,
Mr. Chu was selling expert network services to firms based on a claim that he
had inside information. Specifically, he is alleged to have tried to secure
Richard Choo-Beng, a hedge fund employee, as a client. Mr. Choo-Beng became a
government cooperating witness and later pleaded guilty. Mr. Chu told Mr.
Choo-Beng he could furnish inside information. In one phone call in July 2009,
a person claiming to be an employee of high tech company told Mr. Choo-Beng the
earnings numbers for the company prior to their release. Later Mr. Chu arranged
a similar call with a supposed employee of Broadcom. U.S. v. Chu,
(S.D.N.Y. Filed Nov. 24, 2010).
Option backdating: SEC v. Alexander,
Civil Action No. 06-CV-3844 (E.D.N.Y. Filed Aug. 9, 2006) (here). Former chairman and CEO of
Comverse Technology, Inc., Jacob "Kobi" Alexander, settled option backdating
claims with the SEC and a related civil enforcement action with DOJ. U.S. v.
All Funds on Deposit, Case No. 06-cv-3730 (E.D.N.Y.). The Commission's
complaint against Mr. Alexander and two other former company executives claims
that for over a decade Mr. Alexander and others granted in-the-money options to
themselves and others by backdating the grants (here). Mr. Alexander settled with
the SEC, consenting to the entry of a permanent injunction prohibiting future
violations of Securities Act Action 17(a) and Exchange Act Sections 10(b),
13(b)(5), 14(a) and 16(a). He also agreed to pay $26,206,298 in disgorgement
and $21,442,157 in prejudgment interest along with a $6 million civil penalty
and to be permanently barred from serving as an officer or director of a public
company. His disgorgement and prejudgment interest obligations are deemed
satisfied by the entry of the order in the civil forfeiture action.
Mr. Alexander also settled a civil forfeiture action
which is related to the outstanding criminal case in which he is a defendant.
In All Funds, the government sought the contents of two bank accounts
alleged to contain the profits from the option backdating scheme. Mr. Alexander
and his wife resolved the case by agreeing to the forfeiture of over $46
million in two investment accounts. Mr. Alexander is currently fighting
extradition in Namibia where he is free on bail.
Failure to supervise/fraud: In the Matter of
Hector Gallardo, Adm. Proc. File No. 3-14139 (Nov. 24, 2010)
is a proceeding which names as Respondents Orion Trading, LLC, a registered
broker dealer, Michael Zurita, its chief compliance officer and Hector
Gallardo, a former registered representative with the firm who acted as a
foreign finder. The Order alleges that Mr. Gallardo, while acting as a foreign
finder in Bolivia defrauded citizens of that country. It also claims that Mr.
Zurita, as his supervisor, failed to reasonably supervise Mr. Gallardo and
missed a series of red flags and that he, along with the firm, did not develop
a reasonable system of policies and procedures. The firm is also charged with
having an unlicensed foreign associate. The Order alleges violations of
Exchange Act Sections 15(b)(4)(E) which requires that a broker dealer
reasonably supervise persons subject to their supervision, Section 15(b)(7)
which requires the registration of individuals effecting securities
transactions and Section 10(b). It also alleges violations of Securities Act
Sections 17(a). The case is in litigation.
Investment fund fraud: SEC v. Petty,
Case No. 1:10-CV-3842 (N.D. Ga. Filed Nov. 22, 2010) is an action against
Charles Petty, II and his controlled companies Visionary Publishing
International, LLC and Virtual Properties Worldwide, Inc. According to the
complaint, the defendants have sold promissory notes issued by the companies
since 2007. Investors were told the notes were secured by real estate when in
fact they were not. Investors were also told the proceeds from the note sales
would be used for real estate projects when in fact they were not. Similarly,
investors were told that the notes were high-yielding, which they were not.
Approximately $236,000 worth of notes were sold. The complaint alleges
violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections
10(b). The case is in litigation. See Litig. Rel.
21756 (Nov. 24, 2010).
Investment fraud: SEC v. Financial Services
Moskop & Associates, Inc., Civil Acton No. 10 C 7462
(N.D. Ill. Filed Nov. 22, 2010) is an action against Edward Moskop and his
firm. The SEC's complaint alleges that Mr. Moskop has misappropriated most of
the funds of two elderly investors since 1989. Over the years he
misappropriated their funds and covered up his actions by sending them false
statements. The Commission's complaint alleges violations of Securities Act
Section 17(a) and Exchange Act Section 10(b). The court granted the SEC's request
for an emergency freeze order. The case is in litigation. See Litig. Rel.
21752 (Nov. 22, 2010).
Fraudulent conduct: In the Matter of
Emil C. Busse, Jr., Adm. Proc. File No. 3-14133 (Nov. 22,
2010) is a settled administrative proceeding against Emil Busse, the Managing
Director for securities lending of registered investment adviser FAF Advisors,
Inc. Mr. Busse managed a mutual fund that had a money market portfolio and a
bond portfolio. Both received funds exclusively from loans of securities made
by customers of an affiliate. In the first quarter of 2008, Respondent caused
the reallocation of numerous loans of securities from customers of the money
market portfolio to the bond portfolio. The transactions were undertaken in an
effort to make sure that the NAV for the bond portfolio would not "break the
buck," that is go below $1.00. As a result of these transactions certain
customers in the bond portfolio suffered about $6 million in losses. The Order
charges violations of Advisers Act Actions 206(1), 206(2) and 206(4).
Respondent resolved the charges by consenting to a cease and desist order based
on the sections cited in the Order. He also agreed to be barred from
associating with any broker, dealer or investment adviser and to be prohibited
from serving or acting as an employee, officer, director, member of an advisory
board, investment adviser or depositor, or principal underwriter, with a right
to reapply for association after three years. Mr. Busse was directed to pay a
civil money penalty of $65,000.
Rule 105 short sales: In the Matter of
New Castle Funds LLC, Adm. Proc. File No. 3-14135 (Nov. 22,
2010) is a proceeding against New Castle Funds LLC, a registered investment
adviser. The Order alleges that the firm violated Rule 105 by shelling short
during the restricted period for two offerings in May 2009. One involved the
securities of Anadarko Petroleum Corp. The second is based on sales of the
securities of Wells Fargo & Company. Overall the firm made profits of
$183,084. To resolve the proceeding New Castle consented to the entry of a
cease and desist order from committing or causing any violations and any future
violations of Rule 105 of Regulation M. The firm also agreed to disgorge its
trading profits along with prejudgment interest and to pay a civil penalty of
Investment fraud: In the Matter of
Conal C. Doyle, Adm. Proc. File No. 3-14129 (Nov. 19, 2010)
is an action against Conal Doyle, a self-employed real estate broker and a
registered representation associated with a broker-dealer. From at least March
2008, Respondent sold interests in a purported high yield investment
opportunity called "Project Funding Platform." Under this program investors who
would put $2 million into an escrowed bank account would receive $11.4 million
in net profits within 40 weeks. Mr. Doyle claimed the funds would remain
escrowed and be safe. As the "moderator" of the program he would receive a
$15,000 per week fee. Investors were told the profits would come from a secret banking
system between the Federal Reserve, the World Bank and other international
sources of funds. The documents related to the program were fraudulent and the
claims had no basis according to the Order. As a result, Mr. Doyle is alleged
to have willfully violated Securities Act Sections 17(a)(1) and 17(a)(3). The
Respondent resolved the matter, consenting to the entry of a cease and desist
order based on the sections cited in the Order. He also agreed to be barred
from association with any broker dealer and to pay a civil penalty of $25,000.
Investment fund fraud: SEC v. Dalton,
Civil Action No. 10-CV-02794 (D. Colo. Filed Nov. 16, 2010) is an action
against Richard Dalton, Universal Consulting Resources LLC and relief defendant
Marie Dalton. The complaint alleges violations of Securities Act Sections 5 and
17(a) and Exchange Act Section 10(b) in connection with a Ponzi scheme.
Specifically, the complaint claims that from March 2007 through June 2010, Mr.
Dalton solicited about $17 million from 130 investors in 13 states for either
the "Trading Program" or the "Diamond Program." The former supposedly held
investor funds in a bank while profits came from a European trading program.
The latter involved trading in diamonds. Investors were promised yearly returns
of 60% to 120%. In fact Mr. Dalton funded his personal life with investor
funds. The court entered a freeze order and directed that an accounting be
done. The case is in litigation. See Litig. Rel.
21747 (Nov. 17, 2010).
Investment fund fraud: U.S. v. Wallace,
(S.D.N.Y. Filed Nov. 24, 2010) names
as a defendant Joshua Wallace, a principal of System Capital, LLC, a commodity
trading advisor. Mr. Wallace is alleged to have solicited investors to
trade in e-minis, futures contracts traded electronically on the Chicago
Mercantile Exchange which are based on the S&P 500 index. The defendant
falsely told investors he had at least $28 million in assets under management.
Potential investors were also furnished with documents which falsely portrayed
the performance history of the fund and which the defendant claimed contained
audited returns when in fact they had not been audited. Mr. Wallace has been
charged with commodities fraud, mail fraud, and wire fraud.
Investment fraud: U.S. v. Shah
(S.D.N.Y. Filed Nov. 24, 2010) is a case in which Sanjeev
Jayant Kumar Shah, formerly of Smith Barney, pleaded guilty to a four count
information which alleges one count of securities fraud and three counts of
wire fraud. The charges are based on a fraudulent scheme in which the defendant
presented false documents authorizing Smith Barney to make two transfers
totaling over $3.5 million from a client account supposedly to purchase bonds.
Later, to cover up the transfer, he told the client the bonds did not appear on
the statements because of a computer error. The date for sentencing has not
Theft of trading code: U.S. v. Agrawal
(S.D.N.Y.) (here). Former
Societe Generale high frequency trader Samarth Agrawal was found guilty by a
jury of theft of trade secrets and the interstate transportation of stolen
property from. The charges stem from a claim that the defendant stole high
frequency trading computer code from his employer. SocGen developed a high
speed trading system over a period of years. It was very profitable and
carefully protected. Mr. Agrawal printed out the high frequency code shortly
after receiving a promotion into the high frequency trading department. Subsequently,
Mr. Agrawal secured a new position with Tower Capital Research LLC based on his
representation that he could build Societe Generale's system for them. At
trial, the government introduced a film from a surveillance camera showing Mr.
Agrawal printing out the computer code. The government also furnished the jury
with the computer print out of the code Mr. Agrawal had made prior to resigning
from the firm. The print out had been seized from his home after his arrest. A
date for sentencing has not been set. See also Press
Release, USAO, S.D.N.Y. Dated Nov. 19, 2010.
Insider trading: U.S. v. Camp
(N.D.N.Y.) is one of the cases related to the Dick's Sporting Goods Inc.
transaction (here). In this
case, Gary Camp was charged with conspiracy to commit securities fraud and
securities fraud. Mr. Camp was alleged to have used inside information
furnished by his friend and former Dick's executive Joseph Queri, Jr. to buy
shares in Galyan's Trading Co. just before the announcement that it was being
acquired by Dicks. Mr. Camp and co-defendant Gary Gosson purchased over
$300,000 of Galyan's stock and sold the shares the day after the deal
announcement on June 22, 2004. They had profits of $153,000. Mr. Camp was
acquitted on November 18, 2010 following trial.
Pay-to-play scheme: Henry "Hank"
Morris, the chief political adviser to former New York State Comptroller Alan
Hevesi, pleaded guilty to a felony violation of the Martin Act in the on-going
"pay-to-play" investigation being conducted by the NYAG. Mr. Morris also
agreed to forfeit $19 million which will go to the state pension fund and to be
permanently barred from the securities industry in New York. Mr. Morris is
alleged to have used his influence at the New York State Comptroller's Office
to obtain millions in fees to influence investments from the pension fund (here). The New York AG has
obtained eight guilty pleas in this on-going inquiry. The SEC has a related
case pending against Mr. Morris (here).
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blog by Thomas Gorman