Securities Law Prof Blog

SEC Files Insider Trading Charges Against Former Proprietary Trader

The SEC filed an insider trading case against Joseph M. Mancuso, a former proprietary trader at the registered broker-dealer Schottenfeld Group, LLC, charging him with using inside information to trade ahead of five separate corporate acquisition announcements in 2007, resulting in illicit profits of approximately $350,000. 

The SEC's complaint alleges that Mancuso used material, nonpublic information he was tipped by his good friend and colleague, Zvi Goffer, also a former proprietary trader at Schottenfeld, to trade ahead of the announced acquisitions of Avaya, Inc., 3Com Corp., Axcan Pharma Inc., Hilton Hotels Corp. and Kronos Inc. As alleged in the complaint, the inside information Goffer tipped Mancuso concerning the 3Com, Axcan and Avaya acquisitions was misappropriated by two attorneys at the law firm Ropes & Gray, Arthur Cutillo and Brien Santarlas. The SEC alleges that Cutillo and Santarlas had access to inside information about potential acquisitions involving their firm's clients, and that Goffer paid them kickbacks in exchange for the information, using their mutual friend Jason Goldfarb as a conduit. As alleged in the complaint, Goffer traded on this inside information and tipped the information to Mancuso and others who also traded.

The SEC's complaint alleges that the inside information Goffer tipped to Mancuso concerning the Hilton and Kronos acquisitions came through Gautham Shankar, another former proprietary trader at Schottenfeld. As alleged in the complaint, Shankar was tipped the inside information by Thomas Hardin, a managing director at the hedge fund adviser Lanexa Management. The complaint alleges that Hardin was tipped the information by Roomy Khan, a consultant to a New York-based investment adviser, who had received the inside information from her friend, a credit rating company analyst. The SEC alleges that Goffer also paid kickbacks in exchange for this information. As alleged in the complaint, Goffer traded on this inside information and tipped Mancuso and others who also traded.

The SEC previously charged Goffer, Cutillo, Santarlas, Goldfarb, Shankar, Hardin, and other defendants in connection with this insider trading scheme.

SEC Charges Investment Adviser with Defrauding CALPERS

The SEC charged Umesh Tandon, the CEO of investment advisory firm Simran Capital Management, with lying to the California Public Employees' Retirement System (CalPERS) and other current and potential clients about the amount of money managed by the firm.  Tandon has agreed to settle the SEC's fraud charges.

Institutional investors such as CalPERS often use assets under management (AUM) as a metric to screen prospective investment advisers soliciting their business. An SEC investigation revealed that while pitching Simran's services, Tandon falsely certified to CalPERS that his firm satisfied its minimum AUM requirements. After fraudulently obtaining the business from CalPERS, Tandon also falsely inflated Simran's AUM in communications with other potential clients with whom he touted his firm's relationship with CalPERS. Tandon also fraudulently reported an inflated AUM in filings with the SEC, and he later attempted to mislead SEC examiners during a routine examination of Simran.

According to the SEC's order instituting settled administrative proceedings against Tandon, he represented to CalPERS in May 2008 that Simran met explicit AUM requirements and managed at least $200 million as of Dec. 31, 2007. In fact, Simran managed approximately $80 million at that time. Evidence indicates that Tandon was aware that Simran did not meet the CalPERS requirements for AUM.

Tandon neither admitted nor denied the findings, and agreed to be barred from the securities industry and pay disgorgement of $20,018, prejudgment interest of $1,680, and a penalty of $100,000.

SEC's Walter: Implementing JOBS Act is An Agency Priority

SEC Commissioner Elisse B. Walter testified today before the House Subcommittee on Oversight and Investigations, Committee on Financial Services, on The Implementation of Title II of the JOBS Act.  In her written statement, she acknowledged that Title II rulemaking was required to be completed within 90 days of the JOBS Act's enactment and noted that public comment on the proposed rule was sharply divided:

Sixty-one commenters, including the majority of professional and trade associations/organizations, law firms and legal associations that submitted letters, expressed general support for the proposal, with many stating generally that the elimination of the prohibition on general solicitation or general advertising would facilitate capital formation. In addition, several supporters recommended that the proposed framework for verifying accredited investor status be supplemented in the final rule by including a non-exclusive list of specific verification methods that could be relied upon by issuers seeking greater certainty that they are satisfying the verification requirement. Eighty-one commenters expressed general opposition to the Commission’s proposal, including the Investor Advisory Committee formed by the Commission as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, all of the investor organizations, and all but one of the federal and state officials who submitted letters. Some of these commenters stated that the proposed rules, if adopted, would result in an increase in fraudulent securities offerings, with a number recommending that the Commission consider additional safeguards, such as those recommended in certain pre-proposing release comment letters. Currently, staff in the Divisions of Corporation Finance and Risk, Strategy, and Financial Innovation are developing recommendations for the Commission’s consideration as to how best to move forward with implementation of Title II.

She concluded by stating that the rulemaking "is a priority for the agency."

Denver Businessman Settles SEC Insider Trading Charges in Delta Petroleum Stock

The SEC charged Scott Reiman, described as a prominent Denver-based businessman, with insider trading based on confidential information he obtained from the CEO of Delta Petroleum that was about to secure a huge investment.   According to the SEC, Reiman obtained the inside information ahead of the company’s announcement that it had secured a $684 million investment from private investment firm Tracinda. After the major investment was publicly announced, Delta Petroleum’s stock price jumped almost 20 percent and Reiman reaped substantial illicit profits. The SEC previously charged Reiman’s source, then-CEO Roger Parker, as well as another trader, Michael Van Gilder, in this insider trading investigation.

To settle the SEC’s charges, Reiman agreed to pay nearly $900,000 and be barred from the securities industry and from serving as an officer or director of a public company for at least five years.

According to the SEC’s order instituting proceedings, Reiman is the founder and president of the Denver-based investment firm Hexagon Inc. He received repeated tips from Parker about Tracinda’s potential investment in Delta Petroleum. On three occasions in late November and early December 2007, Reiman bought Delta Petroleum stock or highly speculative option contracts shortly after speaking to Parker, including once within minutes after getting off the phone with him. When Delta publicly announced the Tracinda investment on Dec. 31, 2007, the value of Reiman’s fraudulently obtained Delta Petroleum securities soared nearly 20 percent.

SEC Charges Rogue Trader with Bringing Down Brokerage Firm

The SEC charged David Miller, a former institutional sales trader at Rochdale Securities, a Connecticut-based brokerage firm, with scheming to personally profit from placing unauthorized orders to buy Apple stock. When the scheme backfired, it ultimately caused the firm to cease operations.

Miller agreed to a partial settlement of the SEC's charges and also pleaded guilty today in a parallel criminal case.

The SEC alleges that on Oct. 25, 2012, Miller misrepresented to Rochdale Securities LLC that a customer had authorized the Apple orders and assumed the risk of loss on any resulting trades. The customer order was to purchase just 1,625 shares of Apple stock, but Miller instead entered a series of orders totaling 1.625 million shares at a cost of almost $1 billion. Miller planned to share in the customer's profit if Apple's stock profited, and if the stock decreased he would claim that he erred on the size of the order. The stock wound up decreasing after an earnings announcement later that day, and Rochdale was forced to cease operations in the wake of covering the losses suffered from the rogue trades.

To settle the SEC's charges, Miller will be barred in separate SEC administrative proceedings from working in the securities industry or participating in any offering of penny stock. In the partial settlement in court, Miller agreed to be enjoined from future violations of the antifraud provisions of the federal securities laws. A financial penalty will be determined at a later date by the court upon the SEC's motion.

In the criminal proceeding, Miller pleaded guilty to charges of wire fraud and conspiracy to commit securities and wire fraud. He will be sentenced on July 8.

Ex-KPMG Partner Charged with Insider Trading in Criminal and Civil Charges

No doubt readers of this Blog have been following with interest the developments about the ex-partner of accounting firm KPMG (now identified as Scott London), who has admitted to passing along confidential information about audit clients to a friend (now identified as Bryan Shaw).  London has now been charged criminally with conspiracy to commit securities fraud through insider trading in Los Angeles, and the SEC has brought civil charges.  The complaint says London tipped off Shaw about five KPMG clients (previously only Herbalite and Skechers were identified) in exchange for bags of cash, concert tickets and a Rolex watch.  London allegedly made about $1 million profit in trades.  The illegal activity began in October 2010 and continued for 18 months.

The SEC's civil complaint states that London was the audit partner for Deckers Outdoor Corp.  In addition, London obtained inside information about two impending mergers involving two former KPMG clients -- RSC Holdings and Pacific Capital Bancorp --that he allegedly tipped to Shaw.

WSJ, Former KPMG Partner Is Charged

SEC, SEC Charges Former KPMG Partner and Friend with Insider Trading

SEC Submits Budget Request for FY 2014

The SEC has submitted its budget request for fiscal year 2014, requesting $1.674 billion.  The agency seeks to hire an additional 676 positions.  The request also identifies the SEC's priorities.  (Download Secfy14congbudgjust[1])

SEC Adopts Identity Theft Rules

The SEC adopted rules requiring broker-dealers, mutual funds, investment advisers, and certain other entities regulated by the agency to adopt programs to detect red flags and prevent identity theft.  The agency adopted the rules jointly with the CFTC.

The final rules require certain entities regulated by the SEC such as broker-dealers, mutual funds, and investment advisers to adopt an identity theft program.  The program should include policies and procedures designed to:

• Identify relevant types of identity theft red flags.
• Detect the occurrence of those red flags.
• Respond appropriately to the detected red flags. 
• Periodically update the identity theft program.

The final rules will become effective 30 days after publication in the Federal Register, and the compliance date will be six months after the effective date.

SEC Takes Up Identity Theft Rules April 10

The SEC takes up Identity Theft Red Flags Rules at its April 10, 2013 Open Meeting.  It will  consider whether to adopt new rules and guidelines, jointly with the Commodity Futures Trading Commission, to require certain entities that are subject to the Commissions' respective enforcement authorities to establish programs to address risks of identity theft.

SEC Announces Speakers for Roundtable on Fixed Income Markets

The SEC announced the speakers for its April 16 roundtable on Fixed Income Markets, which will focus on ways to improve the transparency and efficiency of the fixed income markets.  They include:

Panel 1: Current Market Structure for Municipal Securities
Robert F. Auwaerter, Principal and Head of the Fixed Income Group at The Vanguard Group Inc.
John Bonow, CEO at The PFM Group
Larry Bowden, Executive Vice President and Director of Fixed Income Sales and Trading at Stephens Inc.
Ric Edelman, Chairman and CEO at Edelman Financial Services
Joseph A. Hemphill III, CEO at Regional Brokers Inc.
Burton Hollifield, Professor of Financial Economics at Carnegie Mellon University
Craig A. Noble, Managing Director and Head of Retail Fixed Income at Wells Fargo Advisors
Benjamin S. Thompson, CEO and Managing Principal at Samson Capital Advisors LLC
Thomas S. Vales, Chairman and CEO at TMC Bonds LLC  
 
Panel 2: Current Market Structure for Corporate Bonds and Asset-Backed Securities
Steven C. Genyk, Managing Director and Head of Fixed Income Capital Markets at Janney Montgomery Scott LLC
Michael A. Goldstein, Professor of Finance, Donald P. Babson Chair in Applied Investments, and Chair of the Finance Department at Babson College
Nancy Mueller Handal, Managing Director and Head of Structured Finance at MetLife
Colin Heffron, CEO at GFI Group Inc.
Jonathan Horne, Executive Vice President and Portfolio Manager at Pacific Investment Management Company
Richard M. McVey, Chairman and CEO at MarketAxess
Kevin Molloy, Managing Director of Fixed Income at NYSE Bonds
Eric J. Pitt, Managing Director at J.P. Morgan Securities
Neil M. Schloss, Treasurer and Vice President at Ford Motor Company
Robert G. Smith, President, Chief Investment Officer and Principal at Sage Advisory Services Ltd. Inc.  
 
Panel 3: Potential Improvements to the Market Structure for Municipal Securities
Robert F. Auwaerter, Principal and Head of the Fixed Income Group at The Vanguard Group Inc.
Burton Hollifield, Professor of Financial Economics at Carnegie Mellon University
Lynnette Kelly, Executive Director at the Municipal Securities Rulemaking Board
Jason Lehman, Co-CEO and Managing Member at Headlands Technologies LLC
Marshall Nicholson, President at Knight BondPoint
Craig A. Noble, Managing Director and Head of Retail Fixed Income at Wells Fargo Advisors
Paige W. Pierce, President and CEO at RW Smith
Benjamin S. Thompson, CEO and Managing Principal at Samson Capital Advisors LLC
J. Ben Watkins, Director of Bond Finance, State of Florida, and Chairman of the Government Finance Officers Association Debt Committee
Brad Winges, Managing Director and Head of Fixed Income, Sales, Trading and Underwriting at Piper Jaffray Investment Management
 
Panel 4: Potential Improvements to the Market Structure for Corporate Bonds and Asset-Backed Securities
Steven C. Genyk, Managing Director and Head of Fixed Income Capital Markets at Janney Montgomery Scott LLC
Nancy Mueller Handal, Managing Director and Head of Structured Finance at MetLife
Colin Heffron, CEO at GFI Group Inc.
Richard G. Ketchum, Chairman and CEO at FINRA
Richard M. McVey, Chairman and CEO at MarketAxess
Kevin Molloy, Managing Director of Fixed Income at NYSE Bonds
Neil M. Schloss, Treasurer and Vice President at Ford Motor Company
Dexter Senft, Managing Director at Morgan Stanley
Robert G. Smith, President, Chief Investment Officer and Principal at Sage Advisory Services Ltd. Inc.
Kumar Venkataraman, Chairman of the Finance Department and Fabacher Endowed Professor of Alternative Asset Management at Southern Methodist University Cox School of Business
Christopher J. Vogel, Managing Director and Global Head of Fixed Income and Currency Trading at Blackrock Inc. 
 

SEC Charges Former Medical Device Company Employee with Tipping Brother in Expert Networks Case

The SEC charged ThanhHa Bao, who worked in the finance department at Abaxis Inc., a medical device manufacturer, with illegally tipping confidential financial data to her brother, Tai Nguyen, who illegally traded in the company's stock and enabled his hedge fund clients to do the same.  The SEC alleges that  Nguyen's trading in advance of the company's quarterly earnings announcements generated $144,910 in illicit profits. Nguyen, who was charged by the SEC last year, also passed confidential information to clients of his equity research firm Insight Research, including hedge fund managers.  In a parallel criminal proceeding, Nguyen pleaded guilty and has been sentenced to a year and a day in prison. He also agreed to a criminal forfeiture of $400,000.

To settle the SEC's charges, Bao has agreed to pay $144,910 and be barred from serving as an officer or director of a public company for five years.

The SEC's charges stem from its ongoing investigations into expert networks that have uncovered widespread insider trading at several hedge funds and other investment advisory firms.

SEC Approves FINRA's Tightening of "Public Arbitrator" Definition

The SEC approved a FINRA proposed rule change to amend the definition of "public arbitrator" in its Customer and Industry Codes of Arbitration.  Specifically, the proposed rule change would (a) exclude persons associated with a mutual fund or hedge fund from serving as public arbitrators and (b) require individuals to wait for two years after ending certain affiliations before they may be permitted to serve as public arbitrators.   This amendment is another tightening of the definition of "public arbitrator" to exclude individuals with close ties to the securities industry.  SEC, Release No. 34-69297; File No. SR-FINRA-2013-003, Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change to Amend the Customer and Industry Codes of Arbitration Procedure to
Revise the Public Arbitrator Definition (Apr. 4, 2013)

SEC Will Not Charge Netflix CEO with Reg FD Violation; Issues Guidance on Use of Social Media

The SEC issued a Report of Investigation over whether Netflix and its CEO Reed Hastings violated Reg FD when Hastings posted corporate information on his personal Facebook page last July.  The SEC has determined not to pursue an enforcement action.  The report concludes that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation FD so long as investors have been alerted about which social media will be used to disseminate such information.

According to the report:

The SEC’s report of investigation confirms that Regulation FD applies to social media and other emerging means of communication used by public companies the same way it applies to company websites. The SEC issued guidance in 2008 clarifying that websites can serve as an effective means for disseminating information to investors if they’ve been made aware that’s where to look for it. Today’s report clarifies that company communications made through social media channels could constitute selective disclosures and, therefore, require careful Regulation FD analysis.

The report goes on to state that :

although every case must be evaluated on its own facts, disclosure of material, nonpublic information on the personal social media site of an individual corporate officer — without advance notice to investors that the site may be used for this purpose — is unlikely to qualify as an acceptable method of disclosure under the securities laws. Personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information.

SEC Settles Insider Trading Charges Involving Nexen's Acquisition by CNOOC

The SEC announced that a Chinese businessman and his wife whose trading accounts were frozen last year as part of an insider trading case have agreed to settle charges that they loaded up on the securities of Nexen Inc. while in possession of nonpublic information about an impending announcement that the company was being acquired by China-based CNOOC Ltd.

The SEC obtained an emergency court order in July 2012 to freeze multiple Hong Kong and Singapore-based trading accounts just days after the Nexen acquisition was announced and suspicious trading in Nexen stock was detected. The SEC’s complaint alleged that in the days leading up to the announcement, Hong Kong-based firm Well Advantage Limited and other unknown traders purchased Nexen stock based on confidential details about the acquisition.

The SEC’s investigation has identified Ren Feng and his wife Zeng Huiyu as previously unknown traders charged in the complaint as well as Ren’s private investment company CT Prime Assets Limited and four of Zeng’s brokerage customers on whose behalf she traded. They made a combined $2.3 million in illegal profits from Nexen stock trades made by Ren and Zeng.

The settlement, which is subject to court approval, requires the traders to pay more than $3.3 million combined.

In October 2012, the SEC announced a settlement with Well Advantage, which agreed to pay more than $14.2 million to settle the insider trading charges. U.S. District Court Judge Richard J. Sullivan of the Southern District of New York approved that settlement.

 

Senior SAC Advisor Arrested in Insider Trading Investigation

Federal authorities in Manhattan arrested Michael Steinberg, a portfolio manager at New York-based hedge fund advisory firm Sigma Capital Management, and the SEC brought a separate civil enforcement action against him.  The charges in both actions stem from the investigation into trading on inside information in Dell and Nvidia Corp.  St einberg is the most senior employee in Steven Cohen's hedge fund to be arrested

The SEC alleges that Steinberg's illegal conduct generated more than $6 million in profits and avoided losses. Steinberg received illegal tips from Jon Horvath, an analyst who reported to him at Sigma Capital. Horvath was charged last year among several hedge fund managers and analysts as part of the broader investigation into expert networks and the trading activities of hedge funds.

 

SEC Announces Agenda for April 16 Roundtable on Fixed Income Markets

The SEC announced the agenda for its April 16 roundtable to discuss potential ways to improve the transparency and efficiency of fixed income markets. Panelists will be announced at a later date.

The roundtable will be divided into four panels.

The first panel will address current market structure for municipal securities, and the second panel will discuss current market structure for corporate bonds and asset-backed securities.

The third panel will focus on whether potential steps can be taken to improve the transparency, liquidity, or efficiency of the market structure for municipal securities. The fourth panel will focus on whether potential steps can be taken to improve the transparency, liquidity, or efficiency of the market structure for corporate bonds and asset-backed securities.

SEC and Morgan Keegan Directors Settle Enforcement Action

Investment News reports that the SEC has agreed in principle with eight former directors of five Morgan Keegan mutual funds to settle a civil enforcement action brought last December.  In the closely watched action, the SEC charged that the directors failed to exercise their responsibility to ensure accurate valuations of the assets in the funds, which included holdings in subprime mortgage-backed securities.  Investors in the funds lost more than $1 billion when the funds collapsed during the fiscal crisis.  InvNews, SEC settles high-profile case involving former directors of Morgan Keegan funds

SEC Charges Hedge Fund Analyst and Tech Executive with Insider Trading in Advance of Merger

The SEC charged Matthew Teeple, a California-based hedge fund analyst, with insider trading in advance of a merger of two technology companies based on nonpublic information he received from his friend, David Riley, an an executive at one of the companies. The SEC also charged Riley and another trader in the $29 million insider trading scheme.

According to the SEC, Teeple was tipped in advance of a July 2008 announcement that Foundry Networks Inc. had agreed to be acquired by Brocade Communication Systems Inc. for approximately $3 billion. Teeple’s source was Foundry’s chief information officer David Riley. Teeple then caused the San Francisco-based hedge fund advisory firm where he works to buy Foundry shares in large quantities in the days leading up to the public announcement, and the hedge funds managed by the firm reaped millions of dollars in profits when Foundry’s stock value increased upon the news. Teeple also tipped a Denver-based investment professional John Johnson whom he befriended through a previous working relationship, and Johnson made illegal trades based on the nonpublic information. Riley also tipped Teeple in advance of at least two other major announcements by Foundry, and Teeple’s firm traded on the nonpublic information to make profits or avoid losses.

In a separate action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Teeple, Riley, and Johnson.

Civil and Criminal Charges Brought Against Rengan Rajaratnam for Insider Trading

On Thursday the SEC charged Rajarengan “Rengan” Rajaratnam for his role in the massive insider trading scheme for which his older brother Raj Rajaratnam has been convicted.  According to the SEC, from 2006 to 2008, Rengan Rajaratnam repeatedly received inside information from his brother and reaped more than $3 million in illicit gains for himself and hedge funds that he managed at Galleon and Sedna Capital Management, a hedge fund advisory firm that he co-founded. In addition to illegally trading on inside tips, the SEC alleges that Rengan Rajaratnam was an active participant in his brother’s scheme to cultivate highly placed sources and extract confidential information for an unfair advantage over other traders.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Rengan Rajaratnam.

The SEC has now charged 33 defendants in its Galleon-related enforcement actions. The insider trading occurred in the securities of more than 15 companies for illicit gains totaling more than $96 million.

Former Oregon Gubernatorial Candidate Charged with Investor Fraud Involving Pre-IPO Shares of Facebook

This is a weird story:  Both the U.S. Attorney and the SEC have brought charges against Craig Berkman, a former Oregon gubernatorial candidate, alleging that he defrauded investors seeking to acquire highly coveted pre-IPO shares of Facebook and other social media companies.  According to the authorities, Berkman touted to investors that he had special access to scarce sources of pre-IPO stock in Facebook, LinkedIn, Groupon, and Zynga. Instead of purchasing shares on investors’ behalf as promised, Berkman misused their investments to make Ponzi-like payments to earlier investors, fund personal expenses, and pay off claims against him in a bankruptcy case.

The SEC also charged John B. Kern of Charleston, S.C., for his participation in the fraud as legal counsel to some of Berkman’s companies. When investors in Berkman’s phony Facebook fund began questioning what happened to their money after Facebook’s IPO occurred, Kern falsely assured them that their money was used to purchase pre-IPO Facebook stock being held for them by unnamed counterparties.

According to the SEC’s order instituting administrative proceedings, Berkman raised at least $13.2 million from 120 investors by selling membership interests in limited liability companies that he controlled and misappropriated virtually all investor funds that he raised.

The SEC’s order details a recidivist history for Berkman. The Oregon Division of Finance and Securities issued a cease-and-desist order and $50,000 fine against Berkman in 2001 for offering and selling convertible promissory notes without a brokerage license to Oregon residents. In June 2008, an Oregon jury found Berkman liable in a private action for breach of fiduciary duty, conversion of investor funds, and misrepresentation to investors arising from Berkman’s involvement with a series of purported venture capital funds known as Synectic Ventures. The court entered a $28 million judgment against Berkman. In March 2009, Synectic filed an involuntary Chapter 7 bankruptcy petition against Berkman in Florida for his unpaid debts arising from the 2008 court judgment. The parties to the bankruptcy proceeding reached a settlement with Berkman.