Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Friday, December 7, 2007

SEC Alleges Kick Back Schemes Uncovered Through Sting Operation

The SEC announced that it filed civil actions alleging securities fraud in five separate kickback schemes uncovered by an FBI sting operation conducted pursuant to a recent cooperation agreement between the FBI and the Commission.  The defendants are insiders or promoters of publicly traded companies who made stock sales to a hedge fund in exchange for illegal kickbacks to an individual whom they believed to be the hedge fund manager, but who was in reality an undercover FBI agent. The SEC alleges that, in each case, the undercover FBI agent purporting to be a hedge fund manager told the seller or promoter that the kickback had to be kept secret, because buying stock in exchange for kickbacks would violate his fiduciary obligations to the hedge fund. The FBI agent also told the seller or promoter that he had created a phony consulting company to which the kickback could be paid pursuant to a consulting agreement. The sellers or promoters were told that the consulting entity did not exist, that no actual consulting work would be performed, and that the phony consulting arrangement was simply a means to secretly funnel a kickback to the purported hedge fund manager. All of the defendants agreed to pay a kickback. With one exception, the defendants actually paid the promised kickback after the hedge fund bought the stock defendants were promoting. Every buy transaction had a material effect on the stock trading volume of the companies in question.

In related criminal prosecutions, the United States Attorney's Office for the Southern District of Florida today announced the criminal indictments of 6 individuals involved in the schemes.

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