The New York Stock Exchange settled a proceeding this week which alleged that it provided trading information to select proprietary clients prior to releasing it to the public over the last four year. The Commission also filed insider trading actions centered on a corporate director and a registered representative.
The SEC also brought an action centered on the pre-IPO private placement market. There the Order alleged an investment banking firm and its bankers who misrepresented the finances of a company when selling its private placement shares. Finally, a husband and wife team was named as defendants in a complaint focused on a claim that they misappropriated a portion of the funds raised in a municipal bond offering.
Remarks: Commissioner Elisse Walter at the Third SAIS Global Conference on Women in the Board Room (Sept. 20, 2012)(here).
Remarks: Commissioner Luis Aguilar addressed the Hispanic Bar Association of the District of Columbia, delivering remarks titled "Working to Achieve the American Dream" (Sept. 19, 2012). The remarks focused on the operation of the SEC and the Commissioner's background (here).
Testimony: Robert Cook, Director, Division of Trading & Markets, testified before the Senate Committee on Agriculture, Nutrition & Forestry regarding Title VII Implementation. The testimony reviewed Title VII of Dodd-Frank, the on-going coordination of the SEC with the CFTC and other regulators and the adoption of certain rules (here).
SEC Enforcement: Filings and settlements
Statistics: This week the Commission filed 7 civil injunctive actions and 5 administrative proceedings (excluding follow-on and 12j actions).
Insider trading; SEC v. Prado, Civil Action No. 12 CIV 7094 (S.D.N.Y. Filed Sept. 20, 2012) is an action against Waldyr Da Silva Prado Neto, a Brazilian citizen residing in Miami who was employed by Wells Fargo Advisers, LLC as a registered representative. The case centers on the acquisition of Burger King Holdings, Inc. by affiliates of private equity fund 3G Capital Partners Ltd, announced on September 2, 2010. Prior to the acquisition a long time customer of Mr. Prado who had a history of sharing confidential information with him, transferred $50 million through his brokerage account to the fund. Mr. Prado told his firm that the transfer was to purchase a share of a company. After the transfer, and prior to the deal announcement, Mr. Prado had repeated contact with the customer. During that time he purchased share in Burger King and tipped others who traded. E-mail sent to friends suggest, but do not specifically state, that he knew about the deal. Mr. Prado has fled. Mr. Prado and his tippees had profits of over $2 million. The Commission's complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation.
Insider trading: SEC v. Davis (E.D.N.C. Filed Sept. 20, 2012), SEC v. Baggett, Case No. 1:12-mi-99999 (N.D. Ga. Filed Sept. 20, 2012) and SEC v. Wrangell, Case No. 7:12-cv-00274 (E.D.N.C. Filed Sept. 20, 2012) are three settled insider trading cases which center on the acquisition of Mercer Insurance Group, Inc. by United Fire & Casualty Co., announced on December 1, 2010. Defendant H. Thomas Davis, Jr. was a member of the board of directors of Mercer. In that capacity he learned of the pending take-over. Mr. Davis then tipped his friend, defendant Mark Baggett, who purchased 4,426 shares of Mercer. He also told another friend, identified as "remote tippee," who purchased 4,500 shares. Mr. Baggett, in addition, tipped defendant Kenneth Wrangell who purchased 4,500 shares. Following the deal announcement the share price increased about 48% yielding profits for Mr. Baggett of $41,584.55, for "remote tippee" of $42,521.55 and Mr. Wrangell of $42,521.55. Mr. Davis did not trade. Each defendant settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of Exchange Act Section 10(b). In addition, Mr. Davis agreed to be jointly and severally liable for the disgorgement of Mr. Baggett's profits plus prejudgment interest and to pay a penalty of $41,585.45 and to be barred from serving as a director or officer of a public company. Mr. Baggett agreed to pay disgorgement and a penalty in amounts to be determined by the court. Mr. Wrangell agreed to pay disgorgement of $42,521.55 along with prejudgment interest. Because of his extensive cooperation, beginning when he was first contacted by the staff, the amount of his penalty was reduced to $11,380.99.
Account intrusion: In the Matter of Alchemy Ventures, Inc., Adm. Proc. File No. 3-14720 (Sept. 19, 2012) is a proceeding which names as a Respondent Yisroel Wachs, a principal of KM Capital Management, LLC. In 26 instances from January to August 2010 KM and Mr. Wachs extended to a an individual trading access which was used to conduct unauthorized trading in the same securities in hijacked online brokerage accounts. The Order alleges violations of Exchange Act Section 15(a). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Section cited in the Order as well as a censure. He also agreed to pay a $35,000 civil penalty.
Undisclosed conflicts: In the Matter of Western Pacific Capital Management, LLC, Adm. Proc. File No. 3-14619 (Sept. 19, 2012) is a proceeding against the firm, a registered investment adviser, and its president and principal James O'Rourke. From 2005 to 2006 Western Pacific served as placement agent for Ameranth, Inc. for an unregistered offering. The adviser and Mr. O'Rourke urged clients to purchase shares in the company without disclosing that they were being paid a success fee of 10%. Mr. O'Rourke is also alleged to have misused fund assets by purchasing Ameranth stock from an investor who was unhappy with the transaction. The Order alleges violations of Advisers Act Sections 206(1), (2) and (4). To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Western Pacific agreed to pay disgorgement of $482,745 along with prejudgment interest and a civil penalty of $130,000. Mr. O'Rourke also agreed to the entry of an order barring him from the securities business with a right to reapply after two years. Mr. O'Rourke will pay disgorgement of $482,745 along with prejudgment interest and a civil penalty of $130,000.
Investment fund fraud: SEC v. Alleca, Civil Case No. 1:12-cv-03261 (N.D.Ga. Filed Sept. 18, 2012) is an action against private fund manager Angelo Alleca and his advisory firm, Summit Wealth Management Inc, along with three funds Mr. Alleca operated and controlled. Mr. Alleca and Summit Wealth sold interests in Summit Investment Fund LP which was suppose to be a fund of funds. In fact Mr. Alleca traded with the investor funds, incurring huge losses. To cover those losses three new funds were created and investors were solicited. Mr. Alleca planned to take the trading profits from the new funds and use them to cover the losses in Summit Investment. More losses were incurred however. Overall about 200 clients lost $17 million in the scheme. The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), (2) and (4). The Commission obtained a freeze order. The case is in litigation. See also Lit. Rel. No. 22485 (Sept. 19, 2012).
False statements: In the Matter of Advanced Equities, Inc., Adm. Proc. File No. 3-15031 (Sept. 18, 2012) is an action against the company, a broker dealer and investment advisor, and its two co-founders, Dwight O. Badger and Keith G. Daubenspeck. The proceeding centers on the sale of private placement shares in Company A, a Silicon Valley based manufacturer of a device that uses proprietary technology to produce power on a clean and efficient basis. Following a successful private placement, the co-founders of Advanced Equities were permitted to observe board meetings of Company A. In 2009 Company A was operating in "stealth mode," that is, very little information was available about it. Early in the year Messrs. Badger and Daubenspeck began soliciting investors for investments in the company as part of a $150 million "Series F" offering. Although restrictions were placed on the firm regarding what could be represented to investors about it, Mr. Badger made a series of misrepresentations about the size of the backlog of orders, its relationship with a potentially large customer and an application for a loan to the Department of Energy. Keith Daubenspeck supervised Mr. Badger, the firm's investment bankers and had final approval for all management decisions within the firm. During internal sales calls Mr. Daubenspeck remained silent while Mr. Badger made the misrepresentations. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) as well as a failure to reasonably supervise under Exchange Act Section 15(b)(4)(E).
Each Respondent settled. The firm consented to the entry of a cease and desist order based on the Securities Act Sections cited in the Order as well as a censure. It also agreed to pay a civil money penalty of $1 million and implement a series of undertakings. Mr. Badger consented to the entry of a cease and desist order on the same basis and agreed to be barred from the securities business with a right to reapply after one year. He also agreed to pay a civil penalty of $100,000. Mr. Daubenspeck agreed to be suspended from the securities business in a supervisory capacity for twelve months and, in addition, will pay a civil penalty of $50,000.
Misappropriation: SEC v. Cole, Case No. CV 12-8024 (C.D. Cal. Filed Sept. 18, 2012) is an action against Bruce Cole, former CEO of Mamtek U.S., and his wife Manette Cole arising out of a municipal bond offering. In July 2010 the city of Moberly, Missouri backed a $39 million bond offering for Mamtek International, a Hong Kong corporation and its U.S. subsidiary. The financing was for a sucralose processing plant in Moberly. Mr. Cole however diverted over $900,000 in bond proceeds which was wired to his wife for personal expenses. At the time this scheme was hatched Mr. Cole certified in connection with the offering that there were no false and misleading statements. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See also Lit. Rel. No. 22484 (Sept. 18, 2012).
Misappropriation: In the Matter of Walter v. Gerasimowicz, Adm. Proc. File No. 3-145024 (Sept. 14, 2012) is a proceeding which names as Respondents Mr. Gerasimowicz, Meditron Asset Management, LLC or MAM, and Meditron Management Group, LLC or MMG. Mr. Gerasimowicz is the Chairman, CEO and CCO and sole owner of MAM, a registered investment adviser. MMG is an unregistered investment adviser owned by Mr. Gerasimowicz. Over a two year period beginning in 2009 Mr. Gerasimowicz, MAM and MMG diverted about $2.65 million from their client, the Meditron Fundamental Value/Growth Fund, LLC to prop up a contracting company owned by Mr. Gerasimowicz that is in Chapter 11. They also concealed this from their clients and misrepresented the amount of assets under management. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and (4). The proceeding will be set for hearing.
Misappropriation: SEC v. Fiorentino, Case No. 1:12-cv-2388 (S.D. Fla. Filed Sept. 17, 2012). Gilbert Fiorentino served as CEO of the product group at Systemax Inc. and as a corporate director from 2004 until his resignation in May 2011. Systemax sells personal computers and consumer electronics. From 2006 through 2010 Mr. Fiorentino used his position to obtain over $400,000 from those conducting business with Systemax, sharing commissions with one manufacturers representative and receiving monthly payments of $5,000 to $10,000 from another. During this same period Mr. Fiorentino routinely misappropriated property worth several hundred thousand dollars. None of this was disclosed to the company. Mr. Fiorentino concealed this activity by making false representations in company questionnaires that were part of its compliance system and making false statements to the auditors. The Commission's complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and 14(a).
Mr. Fiorentino settled with the Commission, consenting to the entry of a permanent injunction based on each of the Sections cited in the complaint. He also agreed to pay a civil penalty of $65,000 and will be barred from serving as an officer or director of a public company. See also Lit. Rel. No. 22481 (Sept. 17, 2012).
Improper dissemination of information: In the Matter of New York Stock Exchange LLC, Adm. Proc. File No. 3-15023 (Sept. 14, 2012). The proceeding centers on the allegation that the Exchange furnished trading information to its proprietary customers prior to making that same data available to the public. The NYSE receives innumerable buy and sell orders for securities each trading day. This information is fed into its Display Book or DBK for processing which is its matching engine. The NYSE Display Book feeds its information to two sources. One is a proprietary feed called Open Book Ultra from which the information is sent outside the exchange to its proprietary feed customers. The alternate path routs the information to an internal distribution system where it is processed through alternate feeds, one of which is a second proprietary feed while the other formats the information and ultimately makes it available to the public. From June 2008 through July 2011 since the path for distribution to the proprietary feed had less steps than the one for dissemination of the information to the public, it was quicker. The average gap ranged from "single digit milliseconds to 100 or more milliseconds, with the worst disparities exceeding multiple seconds . . ." according to the Order. The system was designed without input from the compliance department and it had no formal compliance program. The Exchange also failed to keep records regarding the operation. The Order alleged violations of Rule 603(a) which requires that exchanges distribute market data on terms that are "fair and reasonable" and not 'unreasonably discriminatory." It also violated Exchange Act Section 17(a) and Rule 17a-1 which require exchanges to keep and maintain at least one copy of each record made or received in the course of the business day. The NYSE exchanged resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited and to a censure. It also agreed to pay a civil penalty of $5 million. The exchange is required to implement a series of undertakings.
Investment fund fraud: U.S. v. Katz, Case No. 1:11-cr-00872 (S.D.N.Y. Filed Oct. 12, 2011) is an action which names as defendant Michael Katz and Christopher Fardella. In October 2011 each defendant pleaded guilty to one count of conspiracy to commit securities fraud and mail fraud and one count of securities fraud. This week each was sentenced to three years in prison. The action was based on a scheme which took place from April 2005 through November of 2005 in which the two men and others used cold calls to solicit over $1 million from investors for a hedge fund they operated, KMPG International, LLC. The representations were false. Rather than invest the money it was diverted to the personal use of the defendants.
Investment fund fraud: U.S. v. Ritter, Case No. 1:12-cr-00704 (S.D.N.Y. Sept. 14, 2012) is an action against accountant Alan Ritter who for years operated a small accounting practice. In 2001 he suffered more than $500,000 in losses from an unrelated business venture. To cover the losses he borrowed money from friends and clients, telling them it would be invested in real estate ventures. In fact he used the funds to cover the losses and finance his living expenses. Interest payments were made to the investors in true Ponzi fashion, with funds obtained from other investors. He also embezzled funds from several clients. Over the eleven year history of the scheme he misappropriated about $6 million. Mr. Ritter pleaded guilty to three counts of wire fraud. U.S. v. Ritter, Case No. 1:12-cr-00704 (S.D.N.Y. Sept. 14, 2012). He is scheduled to be sentenced on January 16, 2013.
Investment fund fraud: Andrew Lit, a director and operator of JD Lit (Firearms) Ltd. of New Port, South Wales, pleaded guilty to two counts of fraudulent trading and was sentenced to serve 32 months. The charges stem from a scheme in which he raised about £57.8 million resulting in investor losses of about ₤8.2 million. The scheme began when his family owned business encountered difficulty in 2004. At that time he started disposing of firearms or retaining the proceeds which belonged to clients, falsifying the books to cover the malfeasance. Mr. Lit also secured short term loans based on the claim that the funds would be used to purchase high value firearms that would be resold. Investors were to receive rates of return well above market by splitting the proceeds from the sales. In fact much of the money raised was used to repay other investors in Ponzi type payments. Eventually the scheme collapsed. The business is in bankruptcy.
The agency announced that the insider trading conviction of former Morgan Stanley Asia Ltd managing director Du Jun was upheld by the court of appeals. Mr. Jun was convicted on nine counts of insider trading. The convictions are based on his actions in February and April 2007 when he purchased a total of 26.7 million shares of CITIC Resources for $86 million while he was part of the Morgan Stanley team advising the Hong Kong listed company on a proposed deal to acquire oil filed assets in China. The court did, however, reduce the prison term from 7 years to 6 and the fine from $23.3 million to $1.688 million in view of the relief sought in a parallel civil proceeding against Mr. Jun that was brought by the SFC and has been stayed pending the resolution of the criminal case.
For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
For more information about LexisNexis products and solutions connect with us through our corporate site.