by T. GormanPosted on Posted in SECActions

Receiving a subpoena from the SEC in an insider trading case can be a bad day. There are ways to make it worse, much worse. A senior corporate official and his broker friend found the formula for making it worse: secret off-shore accounts to evade detection and taxes plus repeatedly misappropriate of inside information plus a cover-up. Those elements turned a civil insider trading case into criminal charges by the U.S. Attorney’s Office for the Central District of California and civil charges by the Commission against the two men. SEC v. Wang (C.D. Calif. Filed Sept. 23, 2013).

The actions were brought against two long time friends who met at church, Jing Wang and Gary Yin. Mr. Wang is a former executive vice president and president of Global Operations for Qualcomm, Inc. Mr. Yin is a former senior vice president, International Wealth Management Adviser, Merrill Lynch.

Off-shore accounts

The insider trading is alleged to have occurred in 2010 and 2011. The story began four years earlier however. In 2006 Mr. Wang approached Mr. Yin about “hiding cash transactions,” according to the complaint. Mr. Yin suggested creating an off-shore entity in the British Virgin Islands that would appear to be controlled by a family member outside the U.S. This would conceal any transactions and also help avoid tax, according to Mr. Yin. Subsequently, the two men created a company known as Unicorn Global Enterprises Ltd. Mr. Wang’s brother who lives in China was listed as sole director. Mr. Wang funded an account for the firm and controlled it.

Mr. Yin followed his friend’s approach. He created a registered entity in the BVI named “Pacific Rim.” It was put in the name of his mother-in-law. A related brokerage account was also created which Mr. Yin controlled. The account was used to avoid paying capital gains tax, according to the complaint.

Mr. Wang was subject to the insider trading rules of his firm. Those required in part that he pre-clear transactions in company stock and make the required filings with the Commission. Mr. Yin coordinated compliance with these requirements for his friend on the transactions in his Merrill Lynch account but not those in the Unicorn account.

Insider trading:

Beginning in the first quarter of 2010 Mr. Wang traded in the shares of Qualcomm on three occasions while in possession of material non-public information, according to the complaint. His friend Mr. Yin followed his actions in two instances, although complaint does not specify that he was tipped.

Increased dividend/stock repurchase: On March 1, 2010, after the close of the market, Qualcomm announced an increase in its dividend and a stock repurchase plan. Earlier, in February Mr. Wang became aware of these plans. On the morning of March 1, he attended a company board meeting where the plan was discussed. Later that day he instructed Mr. Yin to use all of the funds in the Unicorn account at Merrill Lynch to purchase Qualcomm shares. The purchases were made without following the requisite preclearance procedure. Mr. Yin followed, purchasing shares through Pacific Rim. After the announcement the share price increased and both men sold their shares at a profit.

Atheros acquisition: On January 5, 2011 Qualcomm announced the acquisition of Atheros Communications, Inc. The announcement had been presaged the day before by a story in the New York Times Deal Book column. Prior to the announcement Mr. Wang learned about the deal through the course of his duties. He also attended a board meeting where it was discussed. He utilized all the funds in the Unicorn account to purchase Atheros shares. Mr. Yin followed, using his off-shore account. After the announcement the share price increased and both men sold their shares at a profit.

Increased guidance: On January 26, 2011 Qualcomm announced increased guidance. During the prior month Mr. Wang became aware that the firm was considering announcing a significant increase in guidance. That information was confirmed at a December 6, 2010 board meeting Mr. Wang attended. The day before the announcement he telephoned Mr. Yin and instructed him to purchase company shares in the off-shore account. After the announcement the share price increased. Mr. Wang sold all of his shares at a profit.

Mr. Wang had total trading profits of $244,199.66. Mr. Yin had profits of $27,444.02.

The cover up

Mr. Wang became concerned that Merrill Lynch or others might discover his trading. To further conceal his activities he took four key steps:

First: He asked Mr. Yin to delete the trading records for Unicorn. He was informed that could not be done since they were part of the records of Merrill Lynch.

Second: He directed Mr. Yin to set up a new BVI account called Clearview Resources, Ltd. A new Merrill Lynch account was opened. The proceeds from Unicorn were transferred to it.

Third: After being informed by Mr. Yin that the SEC had issued a subpoena for his emails, Mr. Wang created a cover story under which his brother in China would be responsible for the Atheros trades.

Fourth: Mr. Yin removed the Unicorn account from Mr. Wang’s “household” in the Merrill Lynch computer system.

The charges:

The Commission’s complaint alleges violations of Exchange Act Section 10(b) and 16(a). The criminal charges include conspiracy, securities fraud, money laundering and obstruction. Both cases are pending.

Program: Celesq and West Legal Ed present: Financial Fraud: Avoiding the Path of the New SEC Investigative Priority, online on September 25, 2013 at 12:00 p.m. EST (here).

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by T. GormanPosted on Posted in SECActions

The SEC brought insider trading charges against two securities professionals. One was an investment adviser who traded for his account and several of his clients. The other was a registered representative. SEC v. Tabor Klein, Civil Action No. 9:13-cv-80954 (S.D. Fla. Filed September 20, 2013).

The action centers on the acquisition of King Pharmaceuticals, Inc. by Pfizer, Inc., announced October 12, 2010 before the opening of the markets. That day King’s stock closed up 39% at $14.14 per share. Trading volume increased 12,000% compared to the prior trading day.

Defendant Tibor Klein is the owner of Klein Financial Services, an investment adviser in Valley Stream, New York. Defendant Michael Schechtman was a registered representative at Ameriprise Financial, Inc. The two men have been friends for years.

Mr. Klein was also a long time friend of attorney Robert M. Schulman. The two men and their families visited periodically and frequently shared personal information. Mr. Schulman had also entrusted his friend with the management of his investment accounts. Mr. Klein knew the names of several of Mr. Schulman’s clients, including King.

Mr. Schulman was not involved in the King merger negotiations. Since he represented the company in litigation, a law firm colleague who also worked with King informed him about the then pending deal discussions.

During the weekend of August 13-15, 2010 Mr. Klein visited Mr. Klein and his family, spending the night at their home. At one dinner Mr. Schulman drank several glasses of wine and became intoxicated. During the conversation he “blurted out to Klein, ‘It would be nice to be King for a day.’” The complaint claims this remark was “intended to imply he [Schulman] was a ‘big shot’ who knew ‘some kind of information’ about King Pharmaceuticals.”

On August 16, 2010, the first trading day after the dinner, Mr. Klein purchased 800 shares of King stock for himself and 59,800 for 46 of his clients. He continued to acquire King shares. Over a two month period the investment adviser accumulated 65,150 shares for himself and 46 of his clients at a total cost of $585,216.66. This was the largest purchase of a single security made by Mr. Klein in 2010.

Mr. Klein also called his long time friend, Michael Shechtman. While the two men spoke periodically on the phone, on August 16 they had six times telephone calls. That same day Mr. Sheehtman opened an options trading account at his firm. He hand wrote at the top of the form “Please expedite ASAP.” Over the course of the month the two men had repeated telephone calls. At the same time Mr. Sheehtman made multiple purchase of call options for King shares. Prior to these purchases, Mr. Sheehtman had never purchased options. To make portions of these purchases, he had to liquidate other holdings.

Following the announcement of the Pfizer-King deal, Mr. Klein sold all of the King shares he had purchased. He realized profits of $8,824 for his account and $319,550 for his clients, including $15,500 for Mr. Schulman. Mr. Shechtman liquidated his October call options on the day of the announcement and sold other King shares he had purchased, realizing profits of $109,040.53. His September options had expired worthless.

The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation. See Lit. Rel. No. 22803 (September 20, 2013).

Program: Celesq and West Legal Ed present: Financial Fraud: Avoiding the Path of the New SEC Investigative Priority, online on September 25, 2013 at 12:00 p.m. EST (here).

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