Insider trading continues t be the focus as the first quarter of the year came to a close. The SEC and the Manhattan U.S. Attorney’s Office brought another insider trading case against an SAC Capital official. More unidentified traders were identified and then settled with the Commission in its Well Advantage insider trading action. A third insider trading case involved two market professionals and an insider. Another centered on the acquisition of Del Monte. A hedge fund manager and the founder of a New York brokerage firm along with his firm were named as Respondents in an Order alleging fraud and breach of fiduciary duty.
Quarterly statistics show a drop in the number of enforcement actions filed by the SEC in the first quarter of this year compared to the same period in 2012. The number of civil injunctive actions filed in the first quarter of 2013 declined compared to the same period in 2012 while the number of administrative proceedings filed year to date increased over the same period last year.
Remarks: Chairman Elisse Walter addressed the Australian Securities and Investment Commission Forum, Sydney, Audstralia via videoconference (March 24, 2013). Her remarks focused on the new normal of international regulation, particularly in the derivatives markets (here).
Securities class actions
Securities class action settlements reached a 14 year low last year in terms of the number of cases resolved, according to a new report from Cornerstone Research (here). The total dollars paid in those settlements more than doubled compared to the prior year however. In 2012 the total amount paid to settle securities class actions was $2,201 million compared to just $1,405 million in 2011. Settlement values for last year were significantly impacted by mega settlements, defined as those over $100 million. Those settlements accounted for nearly 75% of the total settlement dollars in 2012. That compares to 41% in 2011, 60% in 2010, 75% in 2009 and 52% in 2009. These higher settlement values may also account for the fact that less than 60% of the settlements were fully funded by D&O insurances compared to almost 80% in the prior year. The number of settled cases that involved a corresponding action by the SEC increased last year compared to 2011. In 2012 there were 11 settled securities class actions with a parallel SEC enforcement action compared to just 5 in the prior year. The number last year is far below those in earlier years. In 2012 about 60% of the settled securities class actions cases involved alleged violations of GAAP while the number of accounting fraud actions brought by the SEC in recent years has declined significantly.
SEC Enforcement: Filings and settlements
Weekly statistics: This week the Commission filed 4 civil injunctive actions and 1 administrative proceeding (excluding tag-along-actions and 12(j) proceedings).
Quarterly statistics: In the first quarter of 2013 the Commission filed 47 enforcement actions, excluding tag-along and 12(j) proceeding. That included 33 civil injunctive actions and 14 administrative proceedings. Those totals represent a decline from the first quarter of 2012 when a total of 51 actions were filed, excluding tag-along and 12(j) proceeding. In 2012 there were 42 civil injunctive actions filed in the first quarter compared to the 33 filed this year. In 2012 a total of 9 administrative proceedings filed in the first quarter compared to 14 in for the same period in 2013.
Insider trading: SEC v. Steinberg, 13 CV 2082 (S.D.N.Y. Filed March 29, 2013) is an action against Michael Steinberg, who was a portfolio manager at Sigma Capital during the relevant period. The Commission’s complaint essentially tracks the recently settled Sigma Capital action. It centers on trading in advance of earnings announcements in the shares of Dell, Inc. and Nvidia Corporation. In each instance inside information was obtained from Jon Horvath who belonged to a group which periodically exchanged inside information. In one part of the scheme Sandeep Goyal, an analyst at an investment adviser, obtained inside information about Dell’s May 2008 and later August 2008 earnings announcements. The information was transmitted to Jesse Tortora, an analyst at Diamondback Capital Management, LLC, and then to the group that included Mr. Horvath. Mr. Steinberg obtained the information from Mr. Horvath. Trades were placed in May, generating about $2.6 million in profits and losses avoided and in August 2008, avoiding losses of about $2 million. S.A.C. Select Fund also benefited from the Dell inside information, avoiding losses of about $1 million. In another facet of the scheme Danny Kuo, a fund manager at an unidentified investment adviser, who was also a member of a group sharing information obtained inside information about the earnings of Nvidia. The information traced to a member of the finance department at the company. Again it was passed to Mr. Horvath who in turn relayed it to Mr. Steinberg who caused Sigma Capital to execute trades in May 2009 generating over $500,000 in profits. A parallel criminal case was also brought against Mr. Steinberg. U.S. v. Steinberg, S4 12 CR. 121 (S.D.N.Y. Unsealed March 29, 2013).
Insider trading: SEC v. Well Advantage Ltd., Civil Action No. 12 cv 5786(S.D.N.Y.) is a previously filed “suspicious trading” action against the Hong Kong based company. It centered on the acquisition of Canadian owned oil assets by Chinese oil company Nexen. Well Advantage purchased a large stake in Nexen shortly before the deal announcement. The complaint claimed that the defendant is indirectly owned by Zhang Zhi Rong, a Hong Kong business man who controls a number of companies at least one of which has close ties to CNOOC, China’s largest producer of crude oil and natural gas. This week the Commission identified Ren Feng and his wife Zeng Huiyu as previously unknown traders. Each settled. Reng Feng and his investment company, CT Prime, agreed to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and requiring them to jointly pay disgorgement of $839,714.57 and a penalty in the same amount. Zeng Huiyu agreed to the entry of a similar injunction, to pay disgorgement of $202,030.22 and a penalty in the same amount. She also traded on behalf of four of her brokerage customers who agreed to pay disgorgement. Wong Chi Yu and her company agreed to jointly pay disgorgement of $641,057.94, Wang Wei agreed to pay disgorgement of $137,369.56 and Wang Zhi will pay $466,169.15. Previously, the company settled, consenting to the entry of a final judgment prohibiting future violations of Exchange Act Section 10(b). It also agreed to pay disgorgement of $7,122,633.552 along with prejudgment interest and a penalty in the same amount.
Insider trading: SEC v. Teeple, Civil Action No. CV 2010 (S.D.N.Y. Filed March 26, 2013) is an action against Mathew Teeple, an analyst at a registered Investment Adviser; David Riley, the information officer at Foundry Networks; and John Johnson, currently the chief investment officer of a state pension system who was unemployed at the time of the events in this case. The action centers on three tips. First, on July 28, 2008 Brocade announced that it had signed a definitive merger agreement to purchase Foundry. On July 16, Mr. Riley told his friend Mr. Teeple about the proposed transaction who in turn shared the information with the Investment Adviser where he was employed, Mr. Johnson and numerous friends. All purchased shares. The Investment Adviser had profits of about $13.6 million and avoided a loss of $7.4 million by liquidating what had been a net short position. A friend of Mr. Teeple, Friend A, had profits of $41,000 and Mr. Johnson made $136,000. The second tip centered on an announcement regarding a delay in the closing of the deal. In a conversation on October 16, 2008 Mr. Riley told Mr. Teeple there was a problem with the financing. He again informed the Investment Adviser. By the end of the day the Investment Adviser had sold its entire 1.1 million share stake in Foundry stock. Mr. Teeple also told Friend A who liquidated his shares and established essentially a short position. On October 24, 2008 Brocade announced that the closing of the Foundry acquisition would be delayed. Foundry’s stock price plummeted. The Investment Adviser avoided trading losses of at least $4.3 million. Friend A had profits of about $11,000 from the short position and avoided losses of about $29,000.
The other tip concerned the April 2008 earnings announcement in which the firm stated it would miss street expectations. Prior to the disclosure Mr. Riley informed Mr. Teeple who told the Investment Adviser. The Adviser immediately reversed its trading strategy and began selling short. Prior to the opening of the markets on April 11, 2008 Foundry announced that its results for the quarter were below expectations. The stock price closed down significantly. The Investment Adviser had profits of about $2.6 million. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b).
In a parallel criminal case Messrs. Riley and Teeple have each been charged with one count of conspiracy to commit securities fraud and three counts of securities fraud. Mr. Johnson has been charged with one count of conspiracy to commit securities fraud and one count of securities fraud. Both cases are pending.
Insider trading: SEC v. Bertini, Case No. C 13 1292 (N.D. Cal. Filed March 22, 2013) is an action against Juan Bertini. The case centers around the acquisition of Del Monte Foods Company by an investor group announced on November 25, 2010 at $19 per share, a premium to market. Mr. Bertini was employed at Del Monte as a vice president of finance. By no later than November 11, 2010 Mr. Bertini was invited to join a select group of Del Monte employees working on the deal. He reported directly to the CEO and CFO. Through his position Mr. Bertini came into possession of material, non-public information about the proposed transaction. Between November 18, 2010 and November 23, 2010 he spent $135,000 to acquire 8,000 shares of Del Monte stock. Although he had a brokerage account, the purchases were made through his mother’s account. Subsequently, FINRA contacted Del Monte about certain trading that took place in advance of the take-over announcement. As part of the inquiry Del Monte’s counsel questioned Mr. Bertini. Mr. Bertini claimed that the trades had actually been placed by his mother. Later he settled insider trading charges with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and agreed to pay disgorgement of $16,035, prejudgment interest and a civil penalty of $32,070. He also agreed to the entry of a five year officer and director bar. See also Lit. Rel. No. 22659 (March 22, 2013).
False confirmation: SEC v. Grendys, Civil Action No. 07-120 (D.D.C.) is an action against Mr. Grendys based on claims that he aided and abetted violations of the books and records provisions of the securities laws by Royal Ahold. He is alleged to have executed a materially false a audit confirmation letter. To resolve the action Mr. Grendys consented to the entry of a permanent injunction prohibiting him from aiding and abetting future violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(50. He also agreed to pay a civil fine of $25,000. Three co-defendants previously settled with the Commission. See also Lit. Rel. No. 22657 (March 22, 2013).
Fraud/breach of duty: In the Matter of John Thomas Capital Management Group LLC, Adm. Proc. File No. 3-15255 (March 22, 2013) names as Respondents: George Jarkesy, Jr., his management company, John Thomas Capital Management Group LLC, Anastasios “Tommy” Belesis, and the brokerage he founded, John Thomas Financial, Inc. The Order centers on two key claims, one alleging misrepresentations regarding portfolio values and the other false statements to investors. JT Capital managed two funds. Although investors received monthly statements showing the value of their holdings, key assets were not valued in accord with the representations made to investors. Rather, Mr. Jarkesy assigned them arbitrary values which increased the value of the portfolio and the management fees. The offering materials had similar misrepresentations regarding the role of Respondent Belesis, the millions of dollars paid to JT Financial and even the identity of the outside auditors. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4).
Insider trading: U.S. v. Steinberg, S 4 12 Cr. 121 (S.D.N.Y. Unsealed March 29, 2013) is an insider trading action against Sigma Capital portfolio manager Michael Steinberg. The indictment charges one count of conspiracy and four counts of securities fraud. Two counts of securities fraud are based on trades in advance of Dell’s August 28, 2008 earnings announcement. The remaining two counts are based on trades prior to the May 7, 2009 NVIDIA earnings announcement. The factual allegations are similar to those in the SEC action filed against Mr. Steinberg detailed above.
Manipulation: David Levy and Donna Levy were convicted by a jury in the Southern District of New York last week on all counts for engaging in a long term pump and dump scheme. The two defendants offered to take companies public as part of the scheme. The process involved coordinating marketing and investor relations in exchange for shares. When the start-ups went public Ms. Levy orchestrated false press releases about the companies to increase the price of the stock. After the price increased the shares were dumped or sold. This scheme centered on two companies. Mr. Levy was also convicted of orchestrating a similar scheme for another company. In addition, David Levy was convicted of international money laundering in connection with moving about $2.3 million from the schemes to a Panamanian shell company with bank accounts maintained in Panama.
The board announced a proposal for the reorganization of its auditing standards. Under the proposal the standards would be groups into the following categories: general auditing standards; audit procedures; audit reporting; matters relating to filings under federal securities laws; and other matters associated with audits. The purpose it to facilitate use of the standards.
The UK regulator fined Prudential Group £30 million and censured its Chief Executive Tidjane Thiam for failing to deal with the regulator in an open and cooperative manner. Specifically, the Group failed to inform the FSA in a timely manner that it was seeking to acquire AIA, the Asian subsidiary of AIG in early 2010. The acquisition would have a significant impact on the firm’s strategy and profile. Even at a meeting with company officials, the FSA was not informed. The regulator did not learn about the proposal until after it was leaked to the press.
Survey results: The results of a survey published by the Securities and Futures Commission reflects the fact that the hedge fund industry in Hong Kong continues to expand. By the conclusion of the most recent survey at September 30, 2012 assets under management or AUM had increased by 38% to U.S. $87.1 billion since the end of the prior survey two years earlier. During the same period the number of hedge funds managed by SFC licensed managers increased by 67%. Approximately 94% of the investors in the funds were from outside Hong Kong.
Unauthorized actions: The SFC banned Selina Tsang Siu Kam from the securities business for two years. The predicate for the order was the fact that over a period of years she took order instructions from a third party without written authorization from the client and executed trades without the knowledge or authorization of the client.
High speed trading: The Federal Financial Supervisory Authority, Bonn/Frankfurt, Germany announced that the Bundestag had passed the Act on the Prevention of Risks and Abuse in High-frequency Trading. The Act introduces authorization and special organizational requirements intended to mitigate the risks of the practice.