Insider trading has long been a critical focus of enforcement officials. The actions by the Manhattan U.S. Attorney’s Office and the SEC against former SAC Capital employee Mathew Martoma have fueled speculation regarding the development of the on-going probes into the markets. That speculation was bolstered by the recent disclosure by SAC Capital that it has received a Wells Notice from the SEC staff. All of this, no doubt, impacts those who live on Main Street, intensifying their concern about the fairness of the markets for the average investor.
Friday the SEC brought another action against a market professional which can only serve to increase the anxiety of Main St reet about the fairness of the markets and the role of market professionals. SEC v. Massoud, Civil Action No. 3:12-cv-01691 (D.Ct. Filed Nov. 30, 2012). The action centers on the auction for Patriot Capital Funding, Inc. which was acquired by publically traded debt financier Prospect Capital Corporation in a deal announced on August 3, 2009. The defendant is J. Joseph Massoud, the managing member of Compass Group Management LLC, an unregistered investment company.
Compass Group founded Patriot Capital in 2002 to provide financing to small and mid-size companies. In 2005 the company conducted an IPO after which it was no longer affiliated with Compass.
By early 2009, however, Patriot was experiencing liquidity problems. That difficulty was compounded by problems with two key lenders. By the end of April 2009 FBR Capital Markets, Inc., Patriot’s financial advisor, approached Mr. Massoud about bidding for the company. After executing a confidentiality agreement which precluded the purchase of Patriot shares, Mr. Massoud and his firm analyzed confidential financial material about the firm, made available in a data room. Others were also given access to the data room and invited to submit bids for the financially troubled entity. During the bidding process Mr. Massoud reached out to others and learned about their bidding intentions.
In mid-May 2009, Mr. Massosud began purchasing Patriot shares. Specifically, from May 12 through July 22, 2009, he acquired 322,216 shares of Patriot stock in transactions on 15 different trading days. Many of those purchases were made following a conversation Mr. Massosud had with Patriot’s CEO in which he learned that some bids proposed to acquire the entire company and pay-off all of its debt.
Following the August 3 deal announcement that Prospect Capital would acquire the firm, Patriot’s share price increased from $1.79 per share to close at $3.84 per share. On August 25, 2012 Mr. Massoud sold all of his shares, netting profits of $676,000. The Commission’s complaint alleges violations of Exchange Act Section 10(b).
To resolve the case Mr. Massoud consented to the entry of a permanent injunction prohibiting future violations of the Section cited in the complaint. He also agreed to disgorge his trading profits and pay prejudgment interest and a penalty equal to his trading profits. Mr. Massound will also be barred from serving as an officer or director, from the securities business and from participating in any penny stock offering. See also Lit. Rel. No. 22553 (Nov. 30, 2012).