Adviser Charged with Cherry-Picking (IA)
2.26.2007 The SEC brought charges against Melhado, Flynn & Associates, Inc. (“MFA”), George M. Motz (“Motz”) and Jeanne McCarthy (“McCarthy”) alleging that, from at least January 2001 through April 2005, Motz, the President, CEO and Chairman of the Executive Committee of MFA, engaged in fraudulent trade allocation or "cherry- picking" at MFA, a registered investment adviser and brokerdealer. During the initial period of the scheme, from at least January 2001 until approximately September 2003, Motz unfairly allocated trades that had appreciated in value during the course of the day to MFA's proprietary trading account and allocated purchases that had depreciated in value during the day to the accounts of his advisory clients. Beginning in the summer of 2003, Motz engaged in cherry-picking to favor one of the firm's advisory clients, a hedge fund affiliated with MFA, over his other advisory clients. In addition, in the fall of 2003, Motz, with the assistance of McCarthy, altered order tickets in an attempt to cover up these fraudulent trade allocations. As a result of this fraud, MFA realized ill-gotten gains of approximately $1.4 million. In addition, MFA and Motz earned commissions and fees from advisory clients who were disadvantaged by the cherry-picking scheme.
The Division of Enforcement alleges that MFA, Motz and McCarthy committed primary or secondary violations of the antifraud provisions of the securities laws, among other provisions. The Division of Enforcement is seeking cease-and-desist orders, disgorgement, civil penalties, prejudgment interest, and all other remedial sanctions that are appropriate and in the public interest.
SEC Brings Charges Against Hedge Fund Adviser (HF)
2.26.2007 The SEC filed a settled civil injunctive action against Crestview Capital Partners, LLC (“Crestview”), a hedge fund adviser located in Illinois, and one of its managing members, Stewart R. Flink, charging them with making fraudulent representations in connection with investments by Crestview-managed funds (“Crestview funds”) in two registered direct offerings. Registered direct offerings generally are characterized as privately negotiated sales of securities by public companies pursuant to an effective shelf registration statement. Crestview and Flink made false representations in the offering documentation for the two registered direct offerings that Crestview funds had not shorted the respective issuer's stock in the ten trading days preceding the signing of the documentation. Without admitting or denying the Commission's allegations, Crestview and Flink have agreed to a civil injunction for violations of the federal securities laws. In addition, Crestview agreed to pay $394,640 in disgorgement and civil penalties and to retain an independent consultant to monitor Crestview's compliance procedures. Also, Flink agreed to pay $120,000 in civil penalties.
Filed in the United States District Court for the Northern District of Illinois, the SEC's complaint alleges that Crestview funds agreed to invest $1.4 million in a registered direct offering by Introgen Therapeutics, Inc. (“Introgen”) that was publicly announced on November 26, 2003 and agreed to invest $1.25 million in a registered direct offering by Targeted Genetics Corporation (“Targeted Genetics”) that was publicly announced on February 2, 2004. The complaint further alleges that as a condition to participating in the offerings, Introgen and Targeted Genetics required the Crestview funds to represent in the subscription agreements for the offerings that Crestview funds had not shorted Introgen and Targeted Genetics stock respectively in the ten days preceding the execution of the agreements. The complaint alleges that Flink, acting with full authority for Crestview, knowingly or recklessly signed the Introgen and Targeted Genetics subscription agreements on behalf of Crestview funds, even though Crestview funds had short sold 108,218 and 255,000 shares respectively of Introgen and Targeted Genetics stock in the ten days preceding the execution of the subscription agreements for each of the companies. Flink's shorting of Introgen and Targeted Genetics stock yielded Crestview funds $197,320 in illegal profits.
Adviser Sanctioned for Inflating Assets Under Management to Remain a SEC-Registered Adviser (IA)
2.15.2007 The SEC sanctioned Warwick Capital Management, Inc., and its owner, Carl Lawrence, because the adviser overstated its assets under management over several years in adviser registration statement filings with the SEC. An investment adviser must have $25 million or more in assets under management in order to remain SEC-registered. The SEC found that the adviser supplied inflated performance data and inflated values for its assets under management, to three database services that published it to subscribers.
Hedge Fund Charged with Insider Trading (HF)
2.7.2007 The SEC filed a civil action in federal district court in New York involving an insider trading scheme that generated more than $3.7 million in profits and losses avoided for a family and certain friends. From at least 2001 through 2005, seven individuals, including lawyers and accountants, participated in a scheme to trade in the stock and option contracts of Taro Pharmaceuticals Industries, Ltd. (“Taro”), an Israeli-based publicly traded pharmaceutical company, ahead of eight earnings announcements and five Food and Drug Administration (“FDA”) approval announcements. In the later stages of the scheme, certain defendants broadened the scheme by trading on information stolen from PricewaterhouseCoopers LLP (“PwC”) and Ernst & Young, LLP (“E&Y”) concerning two possible mergers.
In its complaint, the SEC alleged that Zvi Rosenthal (“Zvi”), a Vice President at Taro, abused his position by systematically stealing material, nonpublic information concerning 13 separate company announcements, including earnings results and pending generic drug approvals by the FDA. Zvi then traded on the information and passed it on to his family members, who then traded in Taro stock and options. Typically, Zvi provided information to his son, Amir Rosenthal (“Amir”), who traded in personal accounts he controlled, and in the account of the family-owned and controlled hedge fund, Aragon Partners, LP. Amir also tipped his brothers, Oren Rosenthal and Ayal Rosenthal (“Ayal”); his father-inlaw, Bahram Delshad (“Delshad”); his friend, David Heyman (“Heyman”); and his work supervisor, Young Kim (“Kim”), with information he received from Zvi, and each of them traded. The complaint further alleges that in its later stages, certain of the defendants broadened the scheme to include trading on nonpublic information stolen from entities other than Taro. On at least two occasions, Ayal and Heyman misappropriated material, nonpublic information concerning impending mergers from their respective employers, PwC and E&Y, and tipped Amir with the information. Amir then traded on it. Amir also tipped Kim with the information from Ayal and Heyman, and Kim traded on that information.