In the roll-up to the Labor Day weekend, the SEC issued new rules regarding asset backed securities and credit rating agencies. The Commission also announced a new pilot program on tick size.
SEC Enforcement brought four actions this week. One involved repeated insider trading by an investor relations executive and parallels a criminal action; another focused on financial fraud; and two others concerned investment fund fraud and undisclosed conflicts by an investment adviser.
Rules: The SEC announced on August 27, 2014 the adoption of reform rules regarding asset-backed securities (here).
Rules: The SEC announced on August 27, 2014 the adoption of reform rules regarding credit rating agencies (here).
Trading: The Commission announced on August 26, 2014 a pilot plan to assess stock market tick size impact for smaller companies (here).
SEC Enforcement –Filed and Settled Actions
Statistics: This week the Commission filed 2 civil injunctive actions and 2 administrative proceedings (excluding 12j and tag-along proceedings).
Insider trading: SEC v. Lucarelli, Civil Action No. 14-cv-6933 (S.D.N.Y. Filed August 26, 2014). Michael Lucarelli was the Director of Market Intelligence at Lippert/Heilshorn & Associates, an investor relations firm. He began work at the firm in August 2012 after years at another firm. His role was to develop new client relationships. In that role he did not routinely review drafts of firm press releases. Beginning in August 2013, and continuing through at least August 2014, Mr. Lucarelli is alleged to have used his position at the firm to obtain inside information regarding at least 20 clients. In each instance he traded in advance of a corporate event, purchasing securities and making illicit profits. Overall he is alleged to have had profits of almost $1 million by the SEC.
On July 24, 2014 the FBI obtained a search warrant for Mr. Lucarelli’s office. During the search, which was conducted without his knowledge, a locked briefcase was seized. Inside was a draft press release for firm client TREX Company. The press release contained the second quarter 2014 financial results. The search of his office was completed the next day as Mr. Lucarelli began purchasing shares of TREX. From July 25, 2014 through August 1, 2014 Mr. Lucareli acquired a net position of 37, 400 shares of TREX. Within two hours of the earnings announcement Mr. Lucarelli sold 35,058 of the 37,400 shares he had purchased, yielding profits of almost $90,000. The SEC’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(e). See Lit. Rel. No. 23074 (August 26, 2014). The Manhattan U.S. Attorney’s Office filed parallel criminal charges. U.S. v. Lucarelli (S.D.N.Y.). The criminal complaint alleges 13 counts of securities fraud based on 12 instances of insider trading and illicit trading profits of over $538.000. Both cases are pending.
Conflicts: In the Matter of Edgar R. Page, Adm. Proc. File No. 3-16037 (August 26, 2014) is a proceeding which names as Respondents, Mr. Page, the sole owner and principal of registered investment adviser PageOne Financial, Inc., also a Respondent. The Order alleges that beginning in early 2009, and continuing for about the next two years, the Respondents concealed significant conflicts from the advisory clients. Specifically, those clients were not informed that one of the fund mangers was acquiring a significant stake in PageOne, that Mr. Page had agreed to raise a substantial sum for the private funds and that the fund manager was paying for the acquisition through installment payments which were in part tied to Respondents’ ability to direct client money to the private funds. In addition, misleading disclosures regarding the payments were made in PageOne’s Forms ADV. The Order alleges violations of Advisers Act Sections 206(1), (2) and 207. The proceeding will be set for hearing.
Investment fund fraud: SEC v. Villarreal, Civil Action No. 14-cv-01891 (N.D. Ohio Filed August 26, 2014) names as a defendant Oscar Villarreal. The complaint alleges two fraudulent offering schemes. The first, known as Fund III, raised about $9.2 million from 46 investors beginning in March 2009 and continuing through the end of the next year. Investors were told their funds would be invested in private equity investments in Mexico. Instead portions were used and lost through stock market trading while other funds were misappropriated by Mr. Villarreal. The second, Standard Asset Management Fund I or SAM Fund, raised about $9 million from 11 investors based on false claims that that the funds would be invested in the Mexican stock market. In fact the funds were lost trading in the market and again portions were misappropriated. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending. See Lit. Rel. No. 23073 (August 26, 2014).
Financial fraud: In the Matter of AirTouch Communications, Inc., Adm. Proc. File No. 3-16033 (August 22, 2014). In addition to the firm, Hideyuki Kanakubo, the firm’s founder and former CEO, and Jerome Kaiser, its former CFO, were named as Respondents. The scheme alleged in the Order has two facets. The first involved improper revenue recognition. Specifically, in early 2012 the company developed a new product called U250. It was designed for sale to Mexico’s largest provider of landline telephone services. In July 2012 AirTouch entered into a contract with a Florida based provider of logistics and fulfillment services regarding the product under which about $1.7 million in U250 product would be held by the Florida entity. That entity would execute a Purchase Order for the equipment and an Agreement under which no product would be delivered, and no payment due, unless and until the Mexican entity actually ordered and paid for the product. The revenue from the Purchase Order was booked, however, and reflected in the Form 10-Q filed for the third quarter of the year. Second, the firm used the Purchase Order to secure a $2 million loan from a shareholder who was shown the Purchase Order but not the Agreement. In January 2013 the AirTouch board of directors initiated an internal investigation regarding the net reported revenues in the Form 10-Q for the third quarter of 2012. Although a restatement is supposed to be done, to date it has not been filed. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The proceeding will be set for hearing.
Best execution: The regulator fined Citigroup Global Markets, Inc. $1.85 million and ordered that restitution of $638,000 be paid. The sanctions were imposed because the firm failed to ensure that customers received best execution. Specifically, for certain securities FINRA determined that the firm used a manual pricing methodology that did not appropriately incorporate the National Best Bid and Offer. The firm priced more than 7,200 customer transactions at prices less than NBBO because the firm’s proprietary BondsDirect order execution system used a faulty pricing logic. The regulator also found that Citigroup’s supervisory system and written supervisory procedures for best execution for the specific securities involved here were deficient.