The Commission issued it controversial new Dodd-Frank whistleblower rules by a 3 to 2 vote this week. Many critics claim the rules will undermine corporate compliance programs.
Insider trading is the key theme this week. Insider trading on Capitol Hill with a Senator sending a request to the SEC regarding how it handled certain possible insider trading referrals from FINRA. Two settled insider trading actions filed by the Commission. Another was filed in tandem with DOJ against an NASDAQ official who has pleaded guilty. Insider trading for which a former investment adviser was sentenced to prison.
Whistleblower program: The SEC issued the final rules for the new Dodd-Frank whistleblower program this week. Generally, under the rules those who furnish the SEC with original information that leads to a successful enforcement action in which the penalties exceed $1 million will be eligible for an award. The rules do not require that the information be first reported to the business organization, although additional incentives are offered for such reporting (here).
Insider trading: Senator Charles Grassley, in a May 24, 2011 letter to SEC Chairman Mary Schapiro, is asking the Commission to explain how it has handled possible insider trading inquiries about SAC Capital referred by FINRA beginning as early as January 1, 2000. The letter also requests that the Commission explain: “(1) how the SEC resolved each of these referrals, (2) how the number of referrals over this timeframe compares to similarly situated firms, (3) whether a Wells Notice was ever drafted with regard to SAC Capital related to any of these referrals or related to any other matter (if so, please provide a copy of any Draft or Final Wells Notice).”
Previously, the Senator requested and obtained information from FINRA about referrals relating to possible insider trading by SAC Capital. According to the Wall Street Journal FINRA turned over the details regarding about 20 instances when it found trading by the hedge fund to be suspicious.
FINRA: President Richard Katchum addressed the FINRA Annual Conference on May 24, 2011 discussing changes to the exam program and the challenges presented by keeping pace with regulatory change (here).
Insider trading: SEC v. Abatemarco, Civil Action No. 10 Civ. 9527 (S.D.N.Y.) is a settled action which began as SEC v. One or More Unknown Purchasers of Securities of Martek Biosciences Corp. The action centered on trading in advance of the tender offer by Royal DSM, N.V, a Dutch Company, for Martek Biosciences Corporation, whose headquarters is in Columbia, Maryland. Mr. Abatemarco, a resident of Switzerland, purchased 2,616 Martek call options prior to the announcement on December 21, 2010. Following the announcement the share price rose about 35%, giving the defendant profits of about $1.2 million if he sold the options. On December 22, 2010 the Commission filed this case and froze the trading profits. Subsequently, an amended complaint was filed naming Mr. Abatemarco. He is alleged to have obtained material non-public information about the pending deal from the wife of a DSM employee working on the transaction. To resolve the action Mr. Abatemarco consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e) and to the entry of an order requiring him to disgorge $1,193,594 in trading profits, pay prejudgment interest of $1,438.85 and a civil penalty of $250667.15.
Insider trading: SEC v. Haim, Civil Action No. 11-cv-295 (D.N.Y. Filed May 24, 2011) is an action against Abraham Haim. Between April 2006 and March 2007 his relative, an banker, worked on five corporate take-over deals. Prior to each deal announcement Mr. Haim, who had a close relation with the relative, misappropriated inside information about the pending transaction that he obtained by secretly listening in on the banker’s confidential telephone conversations or reading non-public business documents on visits to the banker’s home. In each instance he traded in advance of the public announcement of the transaction. As a result he had trading profits of $30,126.00. To settle the case Mr. Haim consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). In addition, he agreed to disgorge his trading profits along with prejudgment interest and to pay a civil penalty equal to the amount of the trading profits.
Investment fund fraud: SEC v. Wallace, Civ. Action No. 4:11-cv-01932 (S.D. Tx. Filed May 20, 2011). The defendants are Huston area real estate developers David Wallace and Costa Bajjali. From November 2006 through December 2008 the defendants sold interests in two funds. According to the private placement memoranda the funds would limit their investments to no more than 33% for one and 20% for the other of any one business. Both significantly exceeded the concentration limitations by heavily investing in Business Radio Networks, L.P., struggling media company. The defendants settled, consenting to the entry of permanent injunctions which prohibit future violations of Securities Act Sections 17(a)(2) and 17(a)(3). Each defendant also agreed to pay a civil penalty of $60,000.
Investment fund fraud: SEC v. Vulliez, Civil Action No. 11-cv-3458 (S.D.N.Y. Filed May 20, 2011) is an action against investment adviser Christopher Vulliez and his firm Amphor Advisors, LLC. The court papers allege that between March 2010 and January 2011 the defendants raised over $700,000 from his close family members and friends. The money, along with investments by Mr. Vulliez, was suppose to be put in a biotech company. The investments were never made. The complaint alleges violations of Securities Act Sections 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The action is pending. A freeze order has been issued.
Market manipulation: CFTC v. Parnon Energy, Inc. (S.D.N.Y. Filed may 24, 2011) is anaction against Parnon Energy Inc., Arcadia Petroleum Ltd, Arcadia Energy (Suisse) SA, James Dyer and Nicholas Wildgoose. The complaint alleges that the defendants manipulated and attempted to manipulate NYMEX crude oil futures prices from January 2008 to April 2008. The manipulation was conducted in cycles using three key steps: First, the defendants purchased large quantities of West Texas Intermediate, the benchmark crude for pricing oil futures. They had no commercial use for it. This gave them control of the tight supply. Second, as the price rose the defendants profited from their long positions. At the top of the market defendants they sold short. Third, the physical holdings were sold off which drove down the price and gave the defendants a profit on their short positions. The scheme netted the traders $50 million in profits. The complaint alleges violations of Sections 6(c), 6(d) and 9(a)(2) of the Commodity Exchange Act. The case is in litigation.
Insider trading: U.S. v. Johnson (E.D. Va. May 25, 2011) is an action in which Donald Johnson pleaded guilty to one count of securities fraud. Mr. Johnson is a former managing director on NASDAQ’s market intelligence desk in New York. During the time period of this case he was a member of NASDAQ’s Corporate Client Group. On eight different occasions he traded on inside information entrusted to him by various companies as a result of his position, according to the court papers. The trades, placed between 2006 and 2009, yielded about $640,000 in profits. Mr. Johnson typically placed small trades that he thought would escape notice through his wife’s account. Sentencing is scheduled for August 12, 2011. The SEC filed a parallel action which is pending. SEC v. Johnson, Civil Action No. 11-CV-3618 (S.D.N.Y. filed may 26, 2011).
Insider trading: U.S. v. Poteroba (S.D.N.Y.) is an action against Alexei Koval, a former investment adviser, and Igor Petroba, formerly of UBS Securities, for insider trading. Previously, Mr. Koval pleaded guilty to three counts of securities fraud and one count of conspiracy to commit securities fraud. The case was based on a scheme in which Mr. Poteroba furnished Mr. Koval inside information on six pending corporate take-over transactions. Mr. Koval was sentenced this week to 26 months in prison following which he will serve two years of supervised release. He was also ordered to forfeit $1,414,290.
Financial fraud: U.S. v. Watson, CR 09-372-2 (D. Ariz.) is an action against defendant Don W. Watson, the former CFO of CSK Auto Corporation. The action is based on a scheme to inflate the reported income of the company from 2001 through 2006. Specifically, the company failed to write off millions of dollars of uncollectable rebates it booked as having been received from company vendors. This falsely inflated the pre-tax income of the company in 2002, 2003 and 2004. The company is in bankruptcy. On May 13, Mr. Watson pleaded guilty to one count of conspiracy. Sentencing is scheduled for September 19, 2011. Previously the SEC filed an enforcement action against Mr. Watson and others and a SOX clawback action against the former chairman of the company, Maynard Jenkins.
Investor warning: The regulator issued a warning to investors regarding the benefits and pitfalls of stock based loan programs (here).
Misleading marketing materials: Nuveen Investments, LLC settled a proceeding which alleged that it used misleading marketing materials in the sale of auction rate preferred securities or ARPS. These are auction rate securities but unlike others, these are preferred shares issued by closed end mutual funds to raise money to invest. The marketing materials failed to warn investors adequately of the risks and that the market could become illiquid. The firm also failed to revise the marketing materials after January 2008 when its lead auction manager gave notice that it intended to stop managing Nuveen auctions. In late January the manager failed to submit bids. The auction failed. That failure and the inability of the firm to replace the manager raised serious questions about the liquidity of the ARPS. In February there were widespread auction failures. FINRA also concluded that the firm failed to maintain adequate supervisory procedures to ensure that the materials used adequately described the risks. To date the firm has redeemed about $14.2 billion of the $15.4 billion of ARPS that were outstanding in February 2008. The fund will use its best efforts to redeem all other ARPS outstanding. In resolving this matter Nuveen agreed to pay a $3 million fine.