SEC Settles Insider Trading Case with Company Official

Last week the Commission brought an insider trading action against an in-house counsel at SeaWorld. Another insider trading action filed last week involved the Amazon – Whole Foods merger. There the husband misappropriated inside information on the pending deal from his wife who had been entrusted with inside information by a close family member. Now the agency has settled with a corporate executive who breached his obligations to his firm using the corporate information with which he had been entrusted to trade company securities for his personal benefit prior to a disappointing earnings announcement. SEC v. Wilcox, Civil Action No. 2:19-cv-02437 (D. Ariz. Filed April 16 2019).

Defendant Quentin Louis Wilcox began with Avnet, Inc., a distributor of electronic components, in January 2006 as a Senior Financial Analyst. He was schooled by the firm in its code of conduct which prohibited insider trading.

In May 2015 Mr. Wilcox became the financial manager for budgeting and forecasting at the company. Through that position he had access to Avnet’s financial information which was available on the company SAP Business Explorer computer program.

Beginning in March, and continuing through April, Mr. Wilcox received a number of emails in his capacity as the financial manager regarding the potential financial results for the third quarter of 2017 and the fourth quarter financial guidance. Mr. Wilcox understood toward the end of April that the financial results would be disappointing. One email, for example, depicted revenue for the period while another projected guidance. The revenue numbers were down; the guidance was down.

On April 25, 2017, Mr. Wilcox sold short 2,530 shares of firm stock. The price was $44.99 per share. The next day he placed an order to cover the short position at $35 per share. That same day he also purchased 100 May 19, 2017 put options in the stock. The options had a strike price of $45 per share. The cost was $1.10 per contract. Defendant also placed a sell order for all of the options at a minimum of $5 per contract the same day.

Avent released its earnings announcement for the third quarter along with fourth quarter guidance on April 27, 2017. Both numbers were lower than expected. The share price declined 8% over the trading day.

A few hours after the earnings announcement Mr. Wilcox canceled the “cover” order for the short sale but immediately placed a new cover order at $39 per share. The transaction resulted in a profit of $15,154.70. That same day Defendant’s option order was executed, netting him a total trading profit of $40,000. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a).

To resolve the proceedings Mr. Wilcox consented to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint. In addition, he agreed to pay disgorgement of $55,154 plus prejudgment interest of $3,744 and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 24453 (April 16, 2019).

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SEC Files Another Offering Fraud Action

Offering fraud actions have become one of the staples of the Enforcement Division. With a focus on protecting retail investors, the Division has initiated a series of these cases which often frequently target unsuspecting seniors and retirees who lose much of their life savings. The Division’s most recent case is a good example of these actions. There over 8,400 investors, many of whom were seniors, entrusted at least $1.22 billion over a five year period beginning in July 2012 to boiler room salesmen fronting for a huge Ponzi scheme characterized by sketches and cartoons included in the complaint. Unfortunately for the investors, much of their money is, in probability, largely gone. SEC v. Acevedo, Civil Action No. 1:19-cv-21380 (S.D. Fla. Filed April 11, 2019).

Ivan Acevedo and Dane Roseman, respectively the Director if Investments and an Investment Consultant until their respective resignations from Woodbridge Group of Companies, LLC d/b/a Woodbridge Wealth, are named as defendants in this action. Woodbridge, a collection of dozens of affiliated entities, was owned by President Robert H. Shapiro. The firm is in bankruptcy. The Commission brought an emergency action against Mr. Shapiro and his firm earlier. SEC v. Shapiro, Civil Action No. 1:17-cv-24624 (S.D. Fla.). That action was settled with a consent decree and an agreement to pay over $20 million in disgorgement and prejudgment interest and a $100 million penalty.

Woodbridge initially sold structured settlement to investors who had an annuity from the lottery or a stream of payments from a personal injury settlement. As business waned the model was tied to selling securities in related entities that supposedly made hard money loans to real estate investors with significant rates of return. This structure permitted the firm to tell investors that it could pay substantial monthly returns on the notes they purchased which would be collateralized by the real estate.

The Woodbridge path to profits was was supposedly based on a simple three step plan: 1) Investors lend money to Woodbridge for one year and receive 5% monthly interest payments; 2) Woodbridge Wealth funds the real estate property loan and receives payments from the owner; and 3) the property owner makes payments to Woodbridge and investors receive the first lien position as security.

While properties were purchased by various entities affiliated with Woodbridge, the loans were not profitable. Investors did receive payments, at least for a time. Those payments were not funded by the profits from loans made by the affiliated entities. The payments were made with investor funds.

The three steps to wealth claim was a sham. The operation was a Ponzi scheme whose interests were sold boiler room style by an army of salesmen peddling what were supposed to be private placement interests but were in fact unregistered securities. The representations from the boiler room were laced with an array of unsupported, incorrect and misleading statements that began with the notion that the underlying investments with the affiliated entities were actual transactions and ended with the idea that the investor payments came from those transactions – all lies. Defendants were selling what they knew, or were reckless in not knowing, was an illusion – a sham transaction that is a fraud. It tumbled into bankruptcy. Nevertheless, Messrs. Acevedo and Roseman were paid, respectively, $742,000 and $2.4 million in transaction–based compensation. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a)(1). The case is pending.

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