This Week In Securities Litigation (Week ending September 8, 2017)
p>In the period beginning the week before the Labor Day holiday and the week following it, the Commission brought a series of actions which included three insider trading actions. One involved an attorney who used information about the positions of a client hedge fund manager prior to filing the client’s beneficial ownership forms to trade. A second centered on an employee of a pharmaceutical company and pre-disclosure information about drug trials. A third was based on an Amazon employee who misappropriated earnings announcement information.
The agency also brought: another in a series of actions against an investment adviser for marketing a trading program tied to F-Squared; an action against a broker for overcharging transition clients; a manipulation case based on marking-the-close to try and secure a NASDAQ listing; a professional standards case against an audit engagement partner for issuing a clean opinion to a Fund where its founder had millions of dollars in unauthorized loans; and three offering fraud cases.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC filed 6 civil injunctive cases and 3 administrative proceedings, excluding 12j and tag-along proceedings.
Insider trading: SEC v. Kennedy, Civil Action No. 17-cv-01344 (W.D. Wash. Filed Sept. 7, 2017) is an action which names as defendants, Brett Kennedy, formerly employed at Amazon, Maziar Rezakhani, Mr. Kennedy’s college friend, and Sam Sadeghi, Mr. Rezakhani’s friend. Mr. Kennedy misappropriated confidential earnings and revenue information for the first quarter of 2015. Defendants Sadeghi and Rezakhani traded prior to the earnings announcement, reaping profits of $116,000. Mr. Rezakhani paid $10,000 to Mr. Kennedy for the tip. The complaint alleges violations of Exchange Act Section 10(b). To resolve the case defendants Kennedy and Sadeghi each consented to the entry of a permanent injunction based on the Section cited in the complaint. In addition, Mr. Kennedy agreed to pay disgorgement of $10,000 plus prejudgment interest. Mr. Sadeghi will to pay disgorgement of $11,599.74 plus prejudgment interest and a penalty equal to the amount of his disgorgement. The U.S. Attorney’s Office for the Western District of Washington announced criminal charges against Mr. Kennedy. See Lit. Rel. No. 23931 (Sept. 7, 2017).
Unprofessional conduct: In the Matter of Adrian D. Beamish, CPA, Adm. Proc. File No. 3-18160 (Sept. 7, 2017) is a proceeding which names as a Respondent the PWC audit partner. Mr. Beamish served as the engagement partner on the firm’s audits of Burrill Life Sciences Capital Fund III, LP, a venture capital fund. During the 2009 fiscal year end audit of the Fund’s financial statements, Respondent became aware of the fact that that the management company, founded by Steven Burrill, had arranged for the Fund to pay millions of dollars to the management company as advances on future management services. This was done from 2009 through 2011. The payments were made far in advance. Respondent did not scrutinize the rationale for the payments which Mr. Burrill needed to pay his expenses and those for other ventures. Indeed, Respondent even went along with the rejection by Mr. Burrill of the audit team’s suggestion that disclosure of the arrangements be made. An unqualified audit opinion was issued. The Order alleges violations of Rule 102(e)(1)(ii). To resolve the matter, Respondent consented to the entry of an order denying him the privilege of appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after one year.
Fraudulent fees: In the Matter of State Street Global Markets, LLC, Adm. Proc. File No. 3-18159 (Sept. 7, 2017) is an action which names as Respondents, a registered broker dealer; State Street Global Advisors Funds Distributors, LLC, also a registered broker dealer; and State Street Bank and Trust Company, the principal banking subsidiary of State Street Corporation. The action centers on providing transition management services. Those are provided by some financial institutions to institutional customers that are undergoing a “transition,” such as changing advisers. When providing those services from early 2010 through September 2011 customers were overcharged by about $20 million. Those charges were added on top of the fee arrangements agreed with the customers. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(c)(1). To resolve the matter each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order except 15(c)(1). Respondent State Street Global Markets and State Street Global Advisors Funds Distributors each consented to the entry of a cease and desist order based on Exchange Act Section 15(c)(1). State Street Global Markets and State Street Global Advisors Funds Distributors were censured. Respondents, on a joint and several basis, agreed to pay a penalty of $32.3 million.
Misrepresentations: In the Matter of State Street Bank and Trust Company, Adm. Proc. File No. 3-18158 (Sept. 7, 2017) is a proceeding against the banking subsidiary of State Street Corporation. To build a trading platform for GovEx the firm sought to attract liquidity. To do that certain incentives were offered. With Subscriber A the firm developed a tool called Last Look which permitted that subscriber to take a last look at a potential match for a brief period. Using this tool, between July 2010 and October 2010, Subscriber A rejected 57 of the 157 matches to quotes placed by the Last Look Account. Each had a $1 million face value for a total of $57 million. When other customers asked about the tool Respondent denied having it or using it. Eventually its use was halted. The Order alleges violations of Securities Act Section 17(a)(2). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. Respondent also agreed to pay a penalty of $3 million.
Offering fraud: SEC v. Carton, Civil Action No. 1:17-cv-06764 (S.D.N.Y. Filed Sept. 6, 2017) is an action which names as defendants: Craig Carton, the founder and owner of defendants AdvanceM Ltd., Misoluki, Inc., Misoluke LLC, Ticket Jones, LLC and Tier One Tickets, LLC; and Joseph Meli who controlled defendant Advance Entertainment, LLC. Beginning in mid- 2016 defendants Carton and Meli solicited investments in ticket reselling enterprises. The enterprises were represented to be purchasing and reselling large blocks of concert tickets for substantial profits. Forged document purportedly reflecting agreements to acquire blocks of tickets were used to lure investors. Supposedly the large blocks of tickets were upcoming concerts by artists such as Katy Perry, Justin Bieber, Roger Waters, Metallica, and Barbara Streisand. In fact there were no such agreements. Rather, defendants Carton and Meli misappropriated at least $3.6 million from two investors. Mr. Carton misappropriated an additional $2 million from one of the same investors. Mr. Meli is also named in an earlier action involving the supposed resale of Broadway show tickets. The complaint alleges violations of each subsections of Securities Act Section 17(a) and Exchange Act Section 10(b). A parallel criminal action was brought by the Manhattan U.S. Attorney’s Office.
Insider trading; In the Matter of Alan M. Stark, Esq., Adm. Proc. File No. 3-18147 (Sept. 5, 2017) is an action in which attorney Stark is named as a Respondent. In 2013 Mr. Stark was counsel to a prominent hedge fund manager. In seven instances he became aware that the Fund Manager’s holdings of stock for certain companies crosses the beneficial ownership reporting threshold. Before filing the appropriate form disclosing the Fund Manager’s holdings, in each instance Mr. Stark purchased shares in the company for which the filing was being made. In each instance the share price increased after the filing was made. Mr. Stark had total trading profits of $7,608. The Order alleges willful violations of Exchange Act Section 10(b). To resolve the action Mr. Stark consented to the entry of a cease and desist order based on the Section cited in the Order. He also agreed to pay disgorgement in the amount of his trading profits, prejudgment interest, and a penalty equal to the amount of the disgorgement. He is also denied the privilege of appearing and practicing before the Commission as an attorney.
Manipulation: SEC v. Cedrone, Civil Action No. 17-cv-8099 (S.D. Fla. Filed August 31, 2017). The Defendants are Richard Cedrone, at one time a registered representative but now a convicted felon who bribed an undercover FBI agent to trade for his customer accounts; Steven Ferris, also a former registered representative; and George Thoreson, a registered representative at the time of the transactions here. Abakan, Inc. is a Nevada corporation whose shares are registered with the Commission. It is a penny stock. By early 2012 the firm planned to apply for a listing on NASDAQ. Defendants Ferris and Cedrone were working as investor relations consultants to the firm. When they learned of the listing goal Mr. Thoreson was contacted. He immediately began buying Abakan stock. During the scheme the three men carefully monitored the share price of Abakan. Defendant Thoreson conducted most of the trading, buying about 629,675 shares at a total cost of over $1.3 million. Many of the purchase transactions were manipulative “mark-the-close” trades. Abakan also needed cash to pay its expenses and move its technology toward commercialization. To aid the company Mr. Ferris began selling shares of the firm’s unregistered stock in August 2012. The stock was obtained from undisclosed affiliates who were financing the firm. In several instances the undisclosed affiliates paid consulting fees to Mr. Ferris in unrestricted Abakan shares. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 9(a), 10(b) and 15(b)(6)(B)(i). To resolve the action each defendant consented to the entry of a permanent injunction prohibiting future violations of each of the Sections cited in the complaint except Section 15(b)(6)(B)(i) which was included in the order as to Mr. Cedrone. The order also prohibits each defendant from placing orders to buy or sell securities during the last 60 minutes of any trading day. Mr. Cedrone will pay disgorgement of $5,013.00, prejudgment interest and a penalty of $150,000. That penalty considered the fact that he violated an earlier Commission order. Mr. Thoreson agreed to pay a penalty of $75,000 and to be barred from the securities industry and penny stock offerings. Determination of any penalty against Mr. Ferris is deferred until the terms of his cooperation agreement are completed. See Lit. Rel. No. 23928 (Sept. 5, 2017).
False advertising: SEC v. Navellier & Associates, Inc., Civil Action No. 1:17-cv-11633 (D. Mass. Filed August 31, 2017) is an action against the firm, a registered investment adviser, and Louis Navellier, its founder, principal, CIO and CEO. This is another action arising out of an investment strategy tied to F-Squared Investments, Inc. From 2010 to 2013 defendants marketed an investment called Viro AlphaSector based on information obtained from F-Squared. Defendants did not conduct due diligence regarding the investment. In addition, when red flags arose and it turned out that in fact that AlphaSector did not have a successful track record but had only been back-tested, defendants changed the name and sold it without informing clients. The complaint alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending. See Lit. Rel. No. 23925 (August 31, 2017).
Insider trading: SEC v. Kita, Civil Action No. 3:17-cv-06603 (D. N.J. Filed August 31, 2017) is an action which names as defendants: Evan Kita, formerly an employee at Celator Pharmaceuticals, Inc.; Daniel Perez, Mr. Kita’s next door neighbor; Richard Yu, a close friend of Mr. Kita; and Chiang Yu, the father of Richard Yu. The action centers on trading in advance of two events in 2016. The first was the March 2016 announcement that the firm’s cancer drug Vyxeos had demonstrated positive results in a Phase 3 clinical trial. The second was the May 31, 2016 announcement that Celator would be acquired by Zazz Pharmaceuticals, Plc. In the first instance Mr. Kita obtained information about the drug trial results prior to the announcement. He tipped Defendants Perez and Richard Yu about the results. Richard Yu in turn tipped his father. With respect to the acquisition transaction, Mr. Kita obtained the inside information after he left the company from a friend. Again he tipped his two friends. Again Richard tipped his father. In each instances the tippees traded. On the first Mr. Perez had profits of $40,967 while on the second he had profits of $807. Richard had profits of $18,475 while his father generated trading profits of $245,475 on the first. On the second deal regarding the acquisition transaction Richard had profits of $3,841 while his father made $101,852. In each instance the tips were communicated through an encrypted cell phone program. In each instance the trading profits were split with Mr. Kita. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is pending. The U.S. Attorney’s Office for the District of New Jersey brought a parallel criminal action. See Lit. Rel. No. 23926 (August 31, 2017).
Offering fraud: SEC v. Bennett, Civil Action No. 17-cv-2453 (D. Md. Filed August 25, 2017) is an action which names as defendants Dawn Bennett, formerly a registered representative, and DJB Holdings LLC. The action centers on the sale of notes in the DJB Holdings by Ms. Bennett over a three year period beginning in December 2014 when she was still employed as a registered representative. As her financial condition deteriorated, Defendant Bennett began offering notes in her firm, claiming that the return could be as high as 15%. In making the offering she lied to her employer and later to regulators about her actions. Portions of the funds raised were used to pay for her personal expenses and at times to repay other investors. About $20 million was raised from 46 investors. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the District of Maryland filed a parallel criminal case. See Lit. Rel. No. 23922 (August 29, 2017).
Offering fraud: SEC v. Tennstar Energy, Inc., Civil Action No. CV 417 151 (S.D. Ga. Filed August 11, 2017) is an action which names as defendants Tennstar, the supposed manager of the Joint Venture at the center of the offering, David Greenlee, a convicted felon, David Stewart, a former registered representative, and Richard Underwood, a vice president of Tennstar. The action centers on the sale of interests in the Joint Venture created by Defendants Greenlee and Stewart. Those interest were sold to about 150 investors, raising about $15 million over a three year period beginning in January 2013. Investors were told that their funds would be used to acquire working interests in various oil wells and that enhanced oil recovery techniques would be used to recover oil from the wells. Investors were supposed to earn between 15 and 55% returns. While interests in wells were obtained, the complaint claims that most of the money was diverted to other matters and that the interests acquired were a subterfuge to create the appearance of compliance with the representations. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23924 (August 30, 2017).
Court of Appeals
U.S. v. Matoma, Docket No. 14-3599 (2nd Cir. August 23, 2017) is an action against Mathew Martoma, formerly an SAC Capital portfolio manager. Following a trial on insider trading charges a jury found him guilty and he was sentenced to serve nine years in prison. He appealed to the Second Circuit.
The case centers on trades in the securities of Elan Corporation, plc and Wyeth in 2008. The two pharmaceutical companies had a significant new drug under development that had been in trials since 2006. During the trials, Dr. Sidney Gilman, University of Michigan, was a consultant to Elan. He also worked for, and was paid by, an expert network through which he met Mr. Martoma, at the time a portfolio manager at SAC Capital. Over a period of time Dr. Gilman provided Mr. Martoma with numerous briefings on the development of the drug which included confidential information. Mr. Martoma also met with Dr. Joel Ross, one of the principal investigators on the clinical trial. Dr. Ross provided Mr. Martoma with information about the trial. Dr. Gilman was selected in mid-July to present the results of the trials at a conference scheduled for July 29, 2008. The day after the Doctor learned the final test results he spoke with Mr. Martoma for about 90 minutes on the telephone. Two days later the two men met at the Doctor’s office at the University of Michigan. Dr. Gilman showed Mr. Martoma the power point presentation he planned to use at the upcoming meeting announcing the trial results. The next morning Mr. Martoma spoke on the telephone with Stephen Cohen, the head of SAC Capital. SAC began to reduce its position in Elan and Wyeth securities by entering into short sale and options trades that would be profitable if the two stocks dropped in price the day after the telephone call. Following the July 29, 2008 presentation by Dr. Gilman, the shares of both firms declined significantly. The trades that Mr. Martoma and SAC made in advance of the announcement resulted in about $80.3 million in gains and $194.6 million in avoided losses for the firm. Mr. Martoma personally received a $9 million bonus based in large part on the trading in Elan and Wyeth. While SAC had been billed substantial fees for the earlier meetings with Dr. Gilman, it had not charged for the last two discussions.
Following a trial the court instructed the jury on the requirements of a personal benefit. Those instructions stated in part that a “finding as to benefit should be based on all the objective facts and inferences presented in the case. You may find that Dr. Gilman or Dr. Ross received direct or indirect personal benefit from providing inside information to Mr. Martoma if you find that Dr. Gilman or Dr. Ross gave the information to Mr. Martoma with the intention of benefiting themselves in some manner, or with the intention of conferring a benefit on Mr. Martoma, or as a gift with the goal of maintaining or developing a personal friendship on a useful networking contact.”
The circuit court affirmed the conviction in a split decision. Mr. Martoma argued that the information had been a gift under U.S. v. Newman, 773, F. 3d 438 (2nd Cir. 2014). There the circuit court held that under Dirks v. SEC, 463 U.S. 646 (1983) for a gift there must be “proof of a meaningfully close personal relationship [between the tipper and tippee] that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” While both the majority and dissent agreed that the second prong of this test – the pecuniary gain requirement – had been rejected by Salman v. U.S., 137 S. Ct. 420 (2016), the majority concluded that “the logic of that decision also undercuts the first prong of the Newman test — the ‘meaningfully close personal relationship’” requirement. The dissent disagreed.
Hong Kong
Insider trading: The Securities and Futures Commission brought criminal charges against Au-Yeung Slu Pang alleging insider trading in the shares of China CBM Group Company Limited. Between March 28 and 29, 2012 A-Yeung, who was an employee of China CBM at the time, obtained information about the firm’s unaudited results showing that it had suffered a loss. He traded prior to the release of the information. He also encouraged another to trade. The charges are pending.
Takeovers: The SFC censured Chen Chi-Te and Kenneth C.M. Lo for breaches of the Takeover Code which preclude sales during an offer period or those involved from dealing in the firm’s shares. Both men were directors of Taiwan Cement Corporation and were acting in concert with it in a going private transaction. Between April 25 and June 28, 2017 Chen, who held shares through trusts, sold all of his shares. Lo, together with his relatives, acquired a total of four million shares. Both men accepted that they violated the code.
Coin offerings: The SFC issued a statement warning market participants that under certain circumstances digital tokens that are offered or sold may be securities as defined under the Securities and Futures Ordinance.
Takeover code: The SFC censured and imposed a 24 month cold shoulder (ban from the markets) on Yeung Wing Yee for violating the takeover code. Specifically, Mr. Yeung became a shareholder in Union Asia Enterprise Holdings Limited in July 2016. Subsequently, he acquired a 31.13% interest in the firm which triggered an obligation under the Code to make a general offer to shareholders. No offer was made. Rather, he continued to increase his holdings in the firm. Mr. Yeung represented to the SFC that he had no interest in taking over the firm and was unaware of the Code requirements.