The Commission failed to prove its insider trading claims to the satisfaction of a jury for the second week in a row. This time a Los Angeles jury rejected claims of the agency against a corporate executive that were tied to selling shares in a secondary offering.

The agency also brought actions this week against: A dark pool for failing to maintain the confidentiality of client information; a broker-dealer regarding market access; an individual in an insider trading case where the tips came from high school friends; an attorney tied to misrepresentations; an individual and his firm for market manipulation; and an adviser based on its failure to supervise.

SEC

Remarks: Commissioner Kara M. Stein addressed the Peterson Institute of International Economics, Washington, D.C. (June 12, 2014). Her remarks focused on preventing the next financial crisis, the short term lending markets and how we evaluate capital, leverage and liquidity within financial institutions and funds (here).

Remarks: Commissioner Luis A. Aguilar delivered remarks titled Boards of Directors, Corporate Governance and Cyber-Risks: Sharpening the Focus at the Cyber Risks and the Boardroom Conference, NYSE, New York, New York (June 10, 2014). His remarks focused on the role of the board in overseeing cyber-risk management (here).

SEC Enforcement – Litigated Actions

SEC v. Moshayedi, Civil Action No. CV 12-1179 (C.D. Cal). Defendant Manouchehr Moshyedi is the co-founder and CEO of STEC, Inc., a manufacturer of computer storage devices. The case centered on trading in advance of a secondary offering in which Mr. Moshyedi and his two brothers, who also participated in founding the company, would sell substantial portions of their company stock, yielding gross proceeds of over $133 million. Over a period of eight months, beginning in January 2009, STEC stock increased in price over 800%. During the period the company announced a unique supply agreement with its largest customer, EMC Corporation, for STEC’s flag ship product. Mr. Moshyedi and his brothers decided to take advantage of the price increase by selling a large block of their shares in a secondary offering, according to the complaint. It was scheduled for August 3, 2009, the same day STEC would announce its revenue guidance for the third quarter.

Shortly before the offering Mr. Moshayedi learned that EMC would never enter into another similar agreement with STEC. He also received an internal report indicating that EMC’s actual demand for the flash drive in the last two quarters of the year would not be sufficient to ensure that STEC would meet guidance or the consensus analyst estimates.

After learning these facts, the Commission claims that Mr. Moshayedi engaged in a cover up by entering into a secret deal with EMC in which they committed to purchase a larger quantity of product in the third quarter than they required at a substantial discount.

Following this deal Mr. Moshayedi announced guidance for the third quarter that met the consensus estimate. That guidance included proceeds from the secret deal which were over twice as much as EMC’s actual forecast demand for the quarter. The guidance numbers were only possible because of the secret deal, according to the complaint. The offering went forward. Mr. Moshayedi and his brothers each sold 4.5 million shares of STEC stock. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b).

Mr. Moshayedi disputed the Commission’s claims, detailing his position in a motion filed just before the commencement of trial. There he stated that the initial statements regarding the demand of EMC for the third and fourth quarters were preliminary and, based on past experience, the firm did not view them as covering the entire period. While Mr. Moshayedi knew there was a risk that EMC would accumulate a significant amount of inventory of STEC product, and that would negatively impact firm revenues, that fact had been disclosed. Likewise, there is nothing untoward about the claimed secret deal. It was not entered into for the purpose of meeting guidance. Rather, it was an agreement that gave STEC the information needed regarding what EMC would purchase in the third and fourth quarters so that the company could meet its obligations. Finally, the claim that EMC would not enter into another agreement is belied by the fact that at the time Mr. Moshayedi was engaged in negotiations with EMC which went on for a considerable period over another contract. While the e-mail from EMC does state it would not enter into another agreement, that was simply a negotiating tactic used in the context of the then on-going negotiations. Following trial, the jury rejected the claims of the Commission, finding in favor of Mr. Moshayedi.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed, or announced the filing of, 2 civil injunctive actions, DPAs, NPAs or reports and 6 administrative proceedings (excluding follow-on and Section 12(j) proceedings).

Misrepresentations: In the Matter of Robert C. Acri, Adm. Proc. File No. 3-15926 (June 11, 2014). Robert Acri is an attorney and the co-founder, co-owner and manager of Kenilworth Asset Management LLC, a registered investment adviser. He is also the founder of a private investment fund and was associated with a registered broker-dealer.

Beginning in April 2011, and continuing over the next several months, Mr. Acri and an associate at Kenilworth sold about $240,000 in notes issued by Prairie Common Holdings LLC. The notes had maturities of 6 to 8 months and an annual interest rate of 15%. They were to be secured by real estate. The notes were marketed to Kenilworth clients who were told that the funds would be used to develop a retail parcel of real estate. In marketing the notes Mr. Acri failed to disclose material facts to potential investors regarding the project, its finances and fees that would be paid. Mr. Acri also misappropriated about $41,250 of Kenilworth client funds that were supposed to be used to develop Prairie. Those funds were used to repay other former and current clients and fund investors, in partial payment of a law suit against Mr. Acri and for a loan finder for Praedium. In addition, Mr. Acri failed to take any steps to secure the Prairie notes despite the representations made to investors. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). To resolve the proceeding Mr. Acri consented to the entry a cease and desist order based on the Sections cited in the Order. He is also barred from the securities business and from participating in any penny stock offering. Finally, Mr. Acri will pay disgorgement of $55,0000, prejudgment interest and a civil penalty equal to the amount of the disgorgement.

Supervision: In the Matter of Thomas E. Meade, Adm. Proc. File No. 3-15927 (June 11, 2014) is a proceeding naming as a Respondent the President and Chief Compliance officer of Private Capital Management, Inc., formerly a registered investment adviser. Mr. Meade was aware that there were unique risks of insider trading by vice president Drew Peterson whose father sat on the board of at least one public company, according to the Order. Nevertheless, he failed to design suitable written policies and procedures. He also failed to adequately collect and review personal trading records of firm employees, to maintain strict watch lists and, even after learning that Mr. Peterson had engaged in insider trading, to investigate as required by firm procedures. The Order alleges violations of Advisers Act Sections 204, 204A and 206(4). To resolve the proceeding Mr. Meade consented to the entry of a cease and desist order based on the Sections cited in the Order, to a censure, to an order barring him from the securities business and to pay a penalty of $100,000.

Pay to play: SEC v. Morris, Civil Action No. 09 cv 2518 (S.D.N.Y.) is the previously filed action against Henry Morris and others arising out of a pay to play scheme involving the New York State Common Retirement Fund. This week the Commission settled with the last defendant, Saul Meyer, who previously pleaded guilty and was sentenced to a term of discharge and ordered to forfeit $1 million based on cooperation. In the Commission’s action the Court entered a permanent injunction prohibiting future violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). In a related administrative proceeding Mr. Meyer was barred from the securities business. See Lit. Rel. No. 23017 (June 10, 2014).

Offering fraud: SEC v. E-Monee.com, Inc., Civil Action No. 0:13-cv-60637 (S.D. Fla.) is a previously filed action against the company, Robert Cook and others. It arose out of the fraudulent sale of shares in the company based on claims that it owned Mexican bonds worth billions of dollars. In fact the bonds were essentially worthless. The Court entered a final judgment against Mr. Cook by consent, enjoining him from future violations of Securities Act Sections 17(a)(1) and 17(a)(3) and barring him from participating in any penny stock offering. The Court has the right to determine financial penalties at a later date. See Lit. Rel. No. 23016 (June 10, 2014).

Insider trading; SEC v. Baron, Civil Action No 14-3699 (D. N.J. Filed June 10, 2014) is an action against Michael Baron. The complaint alleges that Mr. Baron received two illegal tips from former high school friends which he furnished to a relative who traded. Specifically, one tip concerned the acquisition of Pharmion Corporation by Celgene Corporation, announced on November 19, 2007. Mr. Baron’s high school friend, John Lazorchak, who worked at the company, furnished the information. The second involved the tender offer by Stryker Corporation for Orthovita, Inc., announced on May 16, 211. The information came from his friend Mark Foldy, an insider at Stryker. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation. See Lit. Rel. No. 2318 (June 10, 2014).

Manipulation: SEC v. Chang, Civil Action No. 1:11-cv-04132 (S.D.N.Y. Filed June 9, 2014) is an action which names as defendants Luis Change and Everbright Development Overseas Limited. In mid-January 2013 the defendants commenced a series of steps which essentially amounted to a false tender offer for the shares of Allied Nevada Gold Corporation, contacting the company and issuing a press release stating that a cash offer had commenced. While taking these steps the defendants acquired over 5% of the firm’s shares. As the price rose they sold their shares, reaping over $7 million in profit. Mr. Chang has fled. Everbright has wired over $20 million. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(d)(1) and 14(e). The Court entered a freeze order. See Lit. Rel. No. 23020 (June 12, 2014).

Concealed commissions: In the Matter of Dennis J. Malouf, Adm. Proc. File No. 3-15918 (June 9, 2014) is a proceeding naming as a respondent the CEO and majority owner of UASNM, Inc., a registered investment adviser. He is alleged to have entered into a secret arrangement with a broker-dealer he used to own to execute all of the bond trades for the adviser between 2008 and 2011. Virtually all of the commissions, totaling about $1.1, million were kicked back to him. The Order alleges violations of Securities Act Sections 17(a(1) and 17(a)(3 and Exchange Act Section 10(b). The proceeding will be set for hearing.

Concealed commissions: In the Matter f UASNM, Inc., Adm. Proc. File No. 3-1591 (June 9, 214) is a proceeding against the registered investment adviser. It stems from misconduct related to client bond trading. Specifically, between 2008 and 2011 Dennis Malouf, the firm’s CEO and majority owner, entered into an arrangement under which bond trades were sent to the branch office of a firm he previously owned for execution. Most of the commissions were then kick-back most of the commissions which totaled about $1.1 million. The firm also failed to seek best execution on the trades or to have reasonable policies related to best execution and failed to reasonably supervise Mr. Malouf. The Order alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 207. To resolve the proceeding the firm agreed to the entry of a cease and desist order based on the cited Sections and a censure. It will also pay a civil money penalty of $100,000.

In the Matter of Liquidnet, Inc., Adm. Proc. File No. 3-15912 (June 6, 2014) is a proceeding naming as a Respondent the registered broker dealer. It operates to a block trading alternative trading system, or ATS, which is a dark pool. Members are primarily large institutional investors who are assured “complete anonymity” in the subscription agreement and the rules. In 2009 Liquidnet launched a new service, its ECM initiative, which eventually developed into a stand-alone business unit. It was designed to introduce Liquidnet as an execution venue for corporate issuers and others. A key feature would permit members to execute transactions in size. Another feature was a desk top application for issuers called InfraRed. It aggregated historical data in the Liquidnet system as a smoothed ratio of “buy” liquidity to “sell” liquidity, caped at a specific ratio.

From the time ECM was launched, through 2011, its employees had access to the confidential member trading information in the Liquidnet system and used pool member data in marketing materials and presentations. This violated Rule 301(b)(1) of Regulation ATS which requires that the pool operator establish adequate safeguards and procedures to protect subscribers’ confidential trading information. Liquidnet also used confidential information about members’ indications in sales tools without disclosing this fact to pool members. The Order alleged violations of Securities Act Section 17(a)(2). Rule 301(b)(2) of Regulation ATS, which requires that pool operators file amendments on Form ATS, was also violated by not filing amendments regarding ECM, a material change in operations. And, Rule 301(b)(10) of Regulation ATS, which requires the operator to establish adequate safeguards and procedures to protect subscribers’ confidential trading information, was also not followed. In resolving the proceeding the Commission considered the prompt remedial actions of the Respondent, which included development of a program that provides members with direct control over the use of their data within the Liquidnet system. Liquidnet consented to the entry of a cease and desist order based on the Section and Rules cited in the Order and to the entry of a censure. It also agreed to pay a fine of $2 million.

Market access: In the Matter of Wedbush Securities Inc., Adm. Proc. File No. 3-15913 (June 6, 2014). The Respondents are the broker dealer, one of the largest providers of market access in the United States, and Jeffrey Bell and Christina Fillhart, respectively the head and a senior member of the division that operates the market access section of the firm. The Market Access Rule, adopted in late 2010, generally requires that broker-dealers appropriately control the risks associated with market access to avoid jeopardizing their financial condition, that of others or the integrity and stability of the market. Wedbush had about 50 sponsored access customers that generated average monthly trading volume of 30 billion shares. Several of the firm’s sponsored access customers had more than 1,000 authorized traders. One had over 10,000 traders. Most of the traders used either their own platform or a leased one – their orders did not flow through the Wedbush system. The Order alleges multiple violations of the market access rule including: The fact that the firm allowed the customers to have access to determine and make changes to risk setting in the platform; it improperly relied on attestations which the Rule was designed to prevent; it failed to have adequate controls to prevent violations of other trading rules; it failed to have adequate controls to ensure compliance with AML reporting and record keeping requirements; it failed to pre-approve all traders; and it did not have written systems for regularly reviewing the effectiveness of its risk management controls and supervisory procedures for market access. The Order alleges violations of Exchange Act Section 15(c)(3), 17(a) , 21C(A) and the related rules. The proceeding will be set for hearing.

PCAOB

Related parties: The Board Adopted Auditing Standard No. 18 and amendments to others. The focus is to strengthen audit requirements regarding related party transactions, significant unusual transactions and a company’s financial relationships and transactions with its executive officers.

Hong Kong

Unauthorized advertisements: Registered adviser Pacific Sun Advisors Limited and its director, Andrew Mantel, were convicted of four charges of issuing advertisements to promote a collective investment scheme without the authorization of the Securities and Futures Commission. The firm was fined $20,000 and Mr. Mantel was sentenced to four weeks imprisonment, suspended for 12 months.

Trading: Christopher Ma Chun Leung and Wong Man Chung were banned from the securities business for, respectively 10 years and two years. Ma, the supervisor of a program trading desk, and Wong, a trader under him, acted against the interest of clients and took advantage of executions of order of institutional clients on the Hong Kong exchange by cancelling over 2,500 orders in 20 securities and replacing them at less advantageous prices. As a result the clients paid an additional $8 million. Both were affiliated with Morgan Stanley Asia Limited, Morgan Stanley Hong Kong Futures Limited an Morgan Stanley Hong Kong Securities Limited. The firm reported the conduct and repaid the clients.

Topics:  Broker-Dealer, Chief Compliance Officers, Enforcement, Enforcement Actions, Fraud, Hong Kong, Insider Trading, Investment Adviser, Liquidnet, Market Manipulation, Misrepresentation, Offerings, Pay or Play, PCAOB, SEC, Securities Fraud

Published In: Business Torts Updates, Civil Procedure Updates, Finance & Banking Updates, International Trade Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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