by T. GormanPosted on Posted in SECActions

The Commission filed two more settled actions tied to the municipal bond market. One a proceeding was brought against a school district, alleging it made false statements regarding its bond offering. In the Matter of West Clark Community Schools, Adm. Proc. File No. 3-15391 (July 29, 2013). A second, related proceeding, named the broker for school district’s offerings and one of its employees. That proceeding alleges that the firm failed to conduct adequate due diligence regarding the offering by the school district, recommended the purchase of the securities without having adequate procedures to ensure prompt compliance by issuers with their obligations, charged improper expenses to the offering and made inappropriate payments to municipal employees. In the Matter of City Securities Corporation, Adm. Proc. File No. 3-15390 (July 29, 2013).

West Park Community Schools is located in Clark County, Indiana. In March 2005 the District conducted an offering for $52 million of municipal bonds. Under Rule 15c2-12 the District executed a Continuing Disclosure Agreement. That undertaking required the District to provide an annual report containing certain financial information and operating data to the appropriate national and sate repositories. The District was also required to provide timely notices of certain specific events regarding the bond issue. One of those obligations was to provide notice if it could not furnish the annual report.

As the sole underwriter for the offering, City Securities reviewed various drafts of the papers which became the Official Statement. Those papers contained the undertakings of the District regarding its future disclosure obligations and reports. The broker disseminated the 2005 Official Statement in connection with the offer and sale of the bonds.

In 2007 the District conducted an offering of $31 million of municipal bonds. City Securities was the sole underwriter. The Official Statement for the 2007 offering contained a representation that over the past five years the District “never failed” to comply in all material respects with its prior undertakings. At the closing the District executed a statement containing a representation stating that the Official Statement was accurate in all material respects.

In 2007 City Securities again served as underwriter. Accordingly, the firm participated in the drafting of the Official Statement for the offering. During that process the firm was obligated to form a reasonable basis through adequate due diligence for believing the truthfulness of the District’s representations regarding compliance with its prior disclosure obligations, according to the Order. Under the firm’s procedures Randy Ruhl, a vice president and named Respondent in the action along with the firm, was designed as supervisor of the Department beginning in January 2007 and as the person responsible for monitoring and ensuring compliance. Mr. Ruhl was obligated to take reasonable steps to ensure that Department employees conducted due diligence. The firm disseminated the 2007 Official Statement in connection with the offer and sale of the bonds.

In fact the District’s representations were false. Between 2005 and 2010 it failed to submit any annual reports or notices as required. The District thus failed to comply with its disclosure obligations and executed a false representation at the 2007 closing. As a result the Order alleges that the District violated Securities Act Section 17(a)(2) and Exchange Act Section 10(b).

The firm, according to the Order, failed to conduct the due diligence necessary regarding the representations of the District. The firm also did not have procedures and policies in place which provided a reasonable assurance it that it would receive prompt notice of certain required disclosure submissions by an issuer.

From 2007 through 2010 the firm also mischaracterized expenses such as charitable donations and entertainment expenses and then billed them back to various municipal securities issuers. The firm also made improper gifts and gratuities to certain personnel of municipal securities issuers. The Order naming City Securities and Mr. Ruhl as Respondents alleges violations of Securities Act Section 17(a)(2) and Exchange Act Sections 10(b), 15(c)(2) and 15B(c)(1). Mr. Ruhl aided and abetted the violations of the firm, according to the Order.

Each Respondent settled with the Commission. The District agreed to implement a series of undertakings that will ensure it has proper policies and procedures. In addition, the District consented to the entry of a cease and desist order “from committing or casing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act . . . “

City Securities agreed to implement a series of undertakings and consented to the entry of a cease and desist order from “committing or causing any violations and any future violations of section 17(a) of the Securities Act, and Sections 10(b), 15(c)(2) and 15B(c)(1) of the Exchange Act . . . “ The firm also agreed to pay disgorgement of $238,000, prejudgment interest and a civil money penalty of $300,000.

Mr. Ruhl consented to the entry of a similar cease and desist order and agreed to pay $18,155 as disgorgement, prejudgment interest and a civil money penalty equal to the amount of the disgorgement. He also agreed to the entry of a bar order from the securities business and from participating in any penny stock offering with a right to apply for reentry after one year. In addition, he agreed to the entry of a bar from serving in a supervisory capacity in the securities business.

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by T. GormanPosted on Posted in SECActions

The case against S.A.C. Capital received what appears to have been a critical, last minute boost when Richard Lee agreed to plead guilty to one count of conspiracy to commit securities fraud and one count of securities fraud on July 23, 2013. U.S. v. Lee, 13 Crim 539 (S.D.N.Y. Filed July 23, 2013, unsealed July 25, 2013). That was just two days before the grand jury handed up an indictment of four corporate entities that are commonly called SAC Capital. Those entities are SAC Capital Advisors, LP (“SAC Capital LP), SAC Capital Advisors LLC, CR Intrinsic Investors LC and Sigma Capital management. U.S. v. SAC Capital Advisors, L. P., 13 Crim 541 (S.D.N.Y. July 25, 2013)(here). The Lee plea deal appears to have furnished the critical evidence to name SAC Capital LP as a defendant.

The Lee case

Richard Lee was a portfolio manager at SAC Capital Advisors, LP from April 2009 through June 2011. He rejoined the firm again in September 2012 and remained through March 2013. Mr. Lee co-managed a portfolio that focused on “special situations” such as mergers and acquisitions, private equity buy-out, and corporate restructurings. The portfolio had about $1.25 billion in purchasing power.

The Information claims that Mr. Lee “obtained Inside Information directly and indirectly from individuals who worked at public companies and investment firms.” In 2009 the Information alleges that he obtained inside information from multiple sources about Yahoo! Inc. In one instance cited in the Information he met with an unnamed co-conspirator on April 20, 2009. That person had inside information about the earnings of Yahoo. The net day Mr. Lee sold about 1.2 million shares of Yahoo in his portfolio at the SAC Capital LP.

On November 11, 2009 Mr. Lee again received inside information. This time it concerned 3Com Corporation. As a result of the information Mr. Lee purchased 700,000 shares of 3Com in his portfolio at SAC Capital LP. Further details regarding that transaction are furnished in the SEC’s parallel case against Mr. Lee. There it states that his source was a Beijing based consultant who had close personal ties with executives at the company. From the Beijing source he learned that 3Com was about to be acquired by Hewlett-Packard.

The SEC’s action cites another instance of insider trading in the securities of Yahoo not specifically identified in the Information. The Commission’s complaint claims that in July 2009 Mr. Lee was told by a sell-side analyst familiar with the nonpublic negotiations between Microsoft and Yahoo that the two firms would enter into an internet search engine partnership. Mr. Lee promptly purchased a large block of Yahoo shares for his SAC Capital LP portfolio as well as in his personal trading account. The SEC’s complaint alleges violations of Exchange Act Section 10(b). SEC v. Lee, Civil Action No. 13-cv-5185 (S.D.N.Y. Filed July 25, 2013).

The SAC Capital indictment

Mr. Lee’s guilty plea is clearly a key element in the indictment against the SAC Capital companies. First, the indictment names four of the SAC Capital entities, one of which is SAC Capital L.P, the firm which employed Mr. Lee. In the section of the indictment concerning that entity, Mr. Lee and his trades in the shares of Yahoo and 3Com are the only examples cited of trading on inside information by SAC Capital LP.

Second, a critical element of the indictment is the claim that SAC “sought to hire PMs [portfolio managers] and RAs [research analysts] believed by the SAC Owner and others in SAC management to have an “edge” based in part on networks of contacts . . .” One example of this practice was the hiring of Mr. Lee “who previously had worked at Hedge Fund A, and was known for being part of Hedge Fund A’s ‘insider trading group,’” according to the indictment. Mr. Lee was hired over the objection of the legal department.

Finally, Mr. Lee is one of eight SAC employees who have been charged with insider trading. Two of those individuals, Matthew Martoma and Michael Steinberg are awaiting trial. The others have pleaded guilty.

Absent Mr. Lee’s guilty plea last week it does not appear that the government would have had the evidence to charge SAC Capital LP. Likewise, the government would not have had other evidence which appears critical to the charges.

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