SEC, USAO Charge Tech Company Founder With Insider Trading

Most of the discussion about insider trading these days is dominated by debates about whether there is a personal benefit, a gift, the application of the Supreme Court’s opinion in Salman last term or the split opinion in Martoma by the second circuit. The common denominator to all these discussions is, of course, the Dirks-Salman principle that tipping is supposed to resemble the insider trading for his or her own account, using company information to secure a personal profit. In the Commission’s latest insider trading case the company founder and CEO did just that – he traded for his account. SEC v. Chang, Civil Action No. 5:17-cv-05438 (N.D. Cal. Filed Sept. 20, 2017).

Defendant Peter Chang is the CEO of Alliance Fiber Optic Products, Inc. which designed and manufactured high performance fiber optic components and integrated modules. Founded in 1995, the company went public in 2000. Through his leadership positions as chairman of the board and CEO Mr. Chang had access to confidential, inside information which belonged to the company.

During his tenure at the firm Mr. Chang had two nominee brokerage accounts – he controlled them but one was in his wife’s name and the other that of his brother. The first was opened at T. Rowe Price under the name of his broker, Daniel Chang. Defendant Chang provided the vast majority of the funds that flowed through the account. From 2003 through October 2015 Mr. Change continually funded the account. During the same period he continuously bought and sold company stock through the account.

On February 3, 2011 Mr. Chang opened a second account. This account was at Scottrade Taiwan under his wife’s name. Funds were later wired to the account. From 2011 through 2015 the account had nominal holdings in firm stock.

In early 2015 the firm began merger talks with Corning Inc. The discussions went-on for several months. During the period Defendant Chang sold company shares in advance of the earnings announcements for the third quarter of 2015 and the fourth quarter of that year, avoiding losses. He acquired shares in advance of the announcement of the tender offer by Corning for the firm on April 7, 2016.

During the same period Mr. Chang’s brother also traded in company shares. His trades closely tracked those in the nominee accounts in timing, size and direction (purchase or sale) of Defendant Chang. Indeed, from the time the brother opened an account in November 2010, the two brothers only traded in Alliance Fiber shares. In total Defendant Chang had trading profits of over $1.5 million while his brother had over $600,000.

Mr. Chang did not report the trades in the two accounts he controlled as required. Likewise, he mislead T. Rowe Price about the account there, suggesting that Peter Chang was not related to the account holder. When FINRA sent inquiries to the company about the identity of traders, the list included the two nominee accounts. Mr. Chang identified the one name as that of his brother but failed to identify the account in the name of his wife.

The complaint alleges violations of Exchange Act Sections 10(b), 14(e) and 16(a). The case is pending. The U.S. Attorney’s Office for the Northern District of California filed a parallel criminal case. See Lit. Rel. No. 23937 (Sept. 20, 2017).

Programs

Seminar: Annual Private Funds Symposium, September 27, 2017, New York City, here

Webcast: Securities Issues & the Supreme Court: A Look Back and Ahead, by Tom Gorman; Celesq Legal Ed, September 28, 2017, here

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Fraudulent “Social Security Maximization” Scheme Ends With Guilty Plea

P.T. Barnum should have said “there is a new scheme born every minute.” Yesterday a Wall Street office and Sinatra songs were used to lure would-be investors to a commodity fraudster who took investor funds for his own and ended in jail. Today, “social security maximization” seminars were used by a registered investment adviser to attract investors looking at retirement. Different day; different scheme; same end – fraudster pleads guilty while the investors lose their hard earned savings. U.S. v. Hudspeth, No. 2:17-cr-122 (E.D. Va.).

Roger Hudspeth and his firm, Dominion Investment Advisors, LLC, were Virginia state registered investment advisers. Mr. Hudspeth and his firm held social security maximization seminars, seeking clients who were approaching retirement. Those who attended were directed to purchase securities that were part of offerings created by Mr. Hudspeth’s associate. The associate had been banned from the securities business by FINRA for fraudulent dealings.

Rather than being safe, conservative investments, the securities from the offerings were unregistered, illiquid and at best highly speculative. Nevertheless, Mr. Hudspeth used a series of misrepresentations to convince potential investors that the investments had merit. Over $6 million was raised from investors. Mr. Hudspeth received about $700,000 for his efforts.

Early in 2016 the Virginia State Corporation Commission entered a judgment order against Mr. Hudspeth, revoking his licenses. His firm was permanently closed. Mr. Hudspeth was prohibited from engaging in any investment advisory activities in the future.

Yesterday Mr. Hudspeth pleaded guilty to one count of investment adviser fraud and one count of conducting unlawful monetary transactions. Sentencing is scheduled for January 22, 2018.

Programs

Seminar: Annual Private Funds Symposium, Chair, Genna Garver, Dorsey & Whitney LLC, September 27, 2017, New York, New York, here

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