by T. GormanPosted on Posted in SECActions

The SEC filed insider trading charges against a registered representative employed in the Florida office of a broker. At the same time the U.S. Attorney for the District of New Jersey filed parallel criminal charges. SEC v. Dowd, Civil Action No. 3:13-cv-00494 (D. N.J.); U.S. v. Dowd (D.N.J.).

The actions center on the acquisition of Pharmasset, Inc., by Gilead Sciences, Inc. announced before the market opened on Monday, November 21, 2011. The announcement followed a non-public auction process which transpired over several weeks. The cash tender offer was for $137 per share, an 89% premium over the closing price on the prior trading day. Following the announcement the share price rose 84.6%.

Defendant Kevin Dowd had been employed for a number of years as a registered representative in the Florida office of the broker. One of the long time clients of the firm was a Director of Pharmasset. During the auction process for the company, the Director informed a Portfolio Manager at the brokerage firm that his company would soon be sold. The Director updated the Portfolio Manager on the deal as the transaction progressed. The Portfolio Manager was the financial adviser to the Director. The conversation was in confidence.

The Portfolio Manager informed Dowd about the transaction. At a meeting involving Mr. Dowd, the Managing Director of the broker’s office and the Office Administrator the Portfolio Manager discussed the transaction in which Pharmasset would be acquired. Specifically, at the meeting the Portfolio Manager instructed the group that they were prohibited from recommending or trading Pharmasset securities because they were in possession of inside information.

Later the Portfolio Manager instructed Mr. Dowd to ensure that the Managing Director did not trade. Mr. Dowd was responsible for entering securities trades for the Managing Director in his personal accounts.

On the last trading day before the deal announcement Mr. Dowd is alleged to have informed a long time friend who worked as a Penny Stock Promoter about the proposed transaction. That person purchased 2,700 shares of Pharmasset on the same day of the call, Friday, November 18, 2011. The Penny Stock Promoter also told another friend who immediately bought call options. Following the announcement of the deal on the next trading day the Penny Stock Promoter had illegal trading profits of $163,621 while his friend had profits of about $544,706.

The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The SEC’s case and that of the U.S. Attorney are pending.

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by T. GormanPosted on Posted in SECActions

The SEC and the U.S. Attorney for the District of Connecticut filed, respectively, civil and criminal fraud charges against a former account executive at Jefferies & Co. arising out of the financial crisis. The charges center on the sale of mortgage backed securities or MBS to funds, including six connected with the Legacy Securities Public-Private Investment Program or PPIP. That fund was established by the U.S. government to help support the MBS market during the market crisis. SEC v. Litvak, Civil Action No. 3:13-cv-00132 (D. Conn. Filed Jan. 28, 2013); U.S. v. Litvak (D. Conn. Jan. 25, 2013).

Defendant Jesse Litvak was associated with Jefferies from 2008 through 20011. He was a managing director and a trader in the firm’s MBS group, resident in the Stamford, Connecticut office. At the time he began with the firm he was an experienced MBS trader. His compensation at Jeffries depended in part on sales.

The MBS sold by Mr. Litvak were generally illiquid. The markets were opaque. Purchasers were aware that a charge for their compensation was added to the purchase price of the security by Jefferies as either part of the price or an add-on. At the same time, the lack of transparency in the market meant that there was no way for a purchaser to determine the accuracy of representations made to them about the purchase prices which were the predicate for the broker transaction charges.

Mr. Litvak is alleged to have overcharged customers by about $2.6 million in 25 transactions between 2009 and 2011. Customers were overcharged in two primary ways, according to the court documents. In some instances Mr. Litvak misrepresented the purchase price paid by his firm for the security. This would increase the commission or spread to Mr. Litvak and his firm. In other instances he misrepresented the nature of the transaction, falsely telling the customer that the security was being acquired in a transaction from another customer when in fact it was being sold out of inventory. Again the purchase price and thus the compensation to Jefferies was increased.

Many of the transactions were done through electronic communications such as instant messages, emails and online chats. Several of these are quoted at length in the Commission’s complaint. That complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b).

The parallel criminal indictment contains eleven counts of securities fraud, one count of TARP fraud, and four counts of making false statements. Both cases are pending.

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