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SEC enforcement brought another insider trading action this week in addition to a case alleging a manipulation, one claiming violations of Regulation M, Rule 105 and one alleging a failure to supervise. The Manhattan U.S. Attorney's Office secured another guilty plea in its expert network insider trading investigation this time by one of the most outspoken critics of that inquiry. Cooperation agreements were announced by the PCAOB with its Spanish counterpart and FINRA with the Alberta Securities Commission. Finally, the FSA announced the successful conclusion to its longest and most complex criminal insider dealing case.
SEC Enforcement: Filings and settlements
Statistics: This week the Commission filed 4 civil injunctive actions and 1 administrative proceedings (excluding follow on and 12j actions).
Reg M: In the Matter of Wesley Capital management, LLC, Adm. Proc. File No. 3-14962 (July 26, 2012) is a proceeding which names the registered investment adviser as a Respondent. Wesley Capital is the adviser to a number of hedge funds and one managed account. In April 2009 the adviser violated Rule 105 of Regulation M by purchasing the shares of two companies in public offerings after having sold the securities of the same issuers short during the five business days prior to the pricing of the offerings, according to the Order. As a result the adviser realized profits of $142,124. To resolve the proceeding the firm consented to the entry of a cease and desist order based on Rule 105 of Regulation M and a censure. It also agreed to disgorge its trading profits along with prejudgment interest and pay a civil penalty of $75,000.
Insider trading: SEC v. Schvacho, 1:12-cv-2557 (N.D. Ga. Filed July 25, 2012) is an action against Ladislav Schavcho which alleges that he traded on inside information in the shares of Comsys IT Partners Inc. prior to its acquisition by Manpower, Inc., announced on February 2, 2010. In the months prior to the announcement Mr. Schavcho repeatedly saw or talked to his long time friend Larry Enterline, the CEO of Comsys. Over the years the two men developed a close relationship and frequently shared confidential information based on the understanding that it would not be disclosed. As the take-over transaction developed Mr. Enterline shared the information with his friend and frequently had business conversations about it in the presence of Mr. Schavcho. After first learning about the proposed deal Mr. Schavcho purchased shares in the company. Later he purchased more. When the deal was announced he sold his shares at a profit of $511,580. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is pending.
Aiding and abetting: SEC v. Feldstein, Civil Action No. 12 Civ. 5751 (S.D.N.Y. Filed July 25, 2012) is an action against Ronald Feldstein alleging that he aided and abetted the filing of a false press release with the Commission. Specifically, the complaint claims that the management of Interlink-US-Network, Ltd. paid Mr. Feldstein to pose as a prospective investor in the company. Interlink then announced an agreement to invest $6 million in the company by LED Capital Corporation whose president was supposedly Mr. Feldstein. The announcement was false. The complaint alleges violations of Exchange Act Sections 10(b) and 13(a). The action is pending. Previously, the Commission brought an action based on the false filing against Interlink and its management. SEC v. Aronson, Civil Action No. 11 Civ 7033 (SD.N.Y.).
Manipulation: SEC v. Williams, Case No 3:12-cv-01068 (D. Conn. Filed July 20, 2012) is an action against Jerry Williams and his controlled entities. Mr. Williams moderated a popular stock trading discussion website known as the Monk's Den. In 2009 Mr. Williams began touting a trading technique he called "Float Lock Down." The strategy called for a group of investors to take advantage of market makers in penny stocks by purchasing the float and holding it. This would squeeze market makers who supposedly were naked shorts. Mr. Williams recommended two candidates for this technique. On was Cascadia Investments, Inc. The other was Green Oasis Environmental, Inc. Investors were not told that Mr. Williams had been hired by Cascadia and Green Oasis to promote their stocks. The two companies paid him with millions of free or heavily discounted shares. As his followers bought and held the securities of the two companies, Mr. Williams sold his shares netting profits of over $2.4 million. Mr. Williams utilized the same approach with a fund he helped created called the U.S. High Performance Fund. The Commission's complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation.
Failure to supervise: In the Matter of Charles L. Rizzo, Adm. Proc. File No. 3-14641 (July 20, 2012) is a proceeding against Charles Rizzo, co-founder of Results One Financial, LLC, a registered investment adviser, and Gina Hornbogen, the chief compliance officer of the firm. The Order alleges that the Respondents failed to reasonably supervise Steven Salutric who, while acting as an investment adviser, misappropriated $7 million from fifteen clients. Over a period of time the two Respondents ignored a series of red flags which included a forged client signature, suspicions that Mr. Salutric was operating a Ponzi scheme and advice from the firm's attorney to contact clients because of suspicious transactions. The Order alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2) by Mr. Salutric and Advisers Act Section 203(e) by the two Respondents. As part of the settlement of the action the Respondents were barred from associating in a supervisory capacity with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent or nationally recognized statistical rating organization. Mr. Rizzo was ordered to pay disgorgement of $35,079 along with prejudgment interest and a civil penalty of $130,000. Mr. Hornbogen was directed to pay disgorgement of $15,592 along with prejudgment interest and a civil penalty of $25,000 which was not higher based on his financial condition.
Insider trading: U.S. v. Kinnucan, 1:12-cr-00163 (S.D.N.Y.) is an action against John Kinnucan, founder of Oregon based Broadband Research, LLC. Mr. Kinnucan pleaded guilty to one count of conspiracy and two counts of securities fraud. He also agreed to forfeit $164,000. From 2008 to 2010 Mr. Kinnucan obtained material non-public information about public companies which he sold to clients of his firm, according to court papers. The information came from officials at business organizations cultivated, and at times paid by, Mr. Kinnucan. Sentencing is scheduled for January 15, 2013. The SEC's parallel case has been stayed pending a resolution of the criminal case. SEC v. Kinnucan, 1;12-cv-01230 (S.D.N.Y. Filed February 17, 2012).
Bid rigging: U.S. v. Murphy (W.D.N.C Filed July 19, 2012). Defendant Philip Murphy was an executive for a financial institution. He was indicted on two counts of conspiracy and one count of wire fraud as part of the on-going probe. The indictment alleges that Mr. Murphy, along with Rubin/Chambers, Dunhill Insurance Services Inc. or CDR, a broker of municipal finance contracts, and others, obtained investment contracts by manipulating the bidding process under which they are awarded. As a result certain parties won the contracts in the auction process. Municipalities paid inflated prices for the investment contracts. The charging papers also claim that Mr. Murphy obstructed the IRS in its efforts to determine if municipal issuers had correctly accounted for money that was owed to the U.S. Treasury. In addition, Mr. Murphy was charged with conspiring with others to falsify bank records related to marketing profits. This permitted the conspirators to conceal the kickbacks paid to CDR and others. The case is pending.
The Board announced a cooperative arrangement with the Accounting and Auditing Institute of Spain relating to the oversight of audit firms subject to the regulatory jurisdictions of each agency. The arrangement will provide a framework for conducting joint inspections and the sharing of confidential information consistent with certain provisions of Dodd-Frank.
The agency announced a cooperation agreement with the Alberta Securities Commission. The agreement will facilitate information sharing between the two regulators regarding firms and individuals under common supervision, support collaboration on investigations and enforcement matters and permit further sharing of regulatory techniques.
The regulator announced the conviction on insider dealing charges of five individuals, Ali Mustafa, Pardip Saini, PareshShah, Neten Shah, Bijai Shah and Truptesh Patel. The trial, which lasted four months, is the longest and most complex conducted by the agency. The charges stem from a scheme which took place between May 1, 2006 and May 31, 2008 in which the defendants obtained confidential inside information from investment banks concerning proposed takeover bids. That information was used to trade yielding profits of £732,044.59.
For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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