by T. GormanPosted on Posted in SECActions

The SEC brought its second insider trading case centered on the acquisition of Burger King Holdings, Inc. by affiliates of private equity fund 3G Capital Partners Ltd, announced on September 2, 2010. The most action settled. The earlier one did not.

The first action, SEC v. Prado, Civil Action No. 12 CIV 7094 (S.D.N.Y. Filed Sept. 20, 2012), was brought against Waldyr Da Silva Prado Neto, a Brazilian citizen residing in Miami who was employed by Wells Fargo Advisers, LLC as a registered representative. Prior to the acquisition a long time customer of the registered representative who had a history of sharing confidential information with him, transferred $50 million through his brokerage account to the fund. Mr. Prado told his firm that the transfer was to purchase a share of a company. After the transfer, and prior to the deal announcement, Mr. Prado had repeated contact with the customer. During that time he purchased shares in Burger King and tipped others who traded, according to the SEC’s complaint. E-mail sent to friends suggest, but do not specifically state, that he knew about the deal. Mr. Prado fled. Mr. Prado and his tippees had profits of over $2 million. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation. In this case Mr. Prado’s assets have been frozen.

The second action was brought against Brazilian citizen and banker Igor Cornelsen and Bainbridge Group Inc., a controlled entity through which he traded securities. Mr. Cornelsen became a customer of broker Prado in 2008. SEC v. Cornelsen, 12 CIV 8712 (S.D.N.Y. Filed Nov. 30, 2012). Two years later, on May 17 2010, the complaint alleges that Mr. Prado sent an e-mail to Mr. Cornelsen in Portuguese which requested that he call to obtain some information. A ten minute phone conversation that day was followed by the purchase of 2,850 Burger King call options the next day.

Over the summer Mr. Cornelsen continued to have contact with the broker and purchase Burger King call options. Some purchases resulted in losses. Then, on August 18, 2010 he e-mailed Mr. Prado in Portuguese asking if the “sandwich deal” would happen. The answer was “yes.” In response to an inquiry about the timing, Mr. Prado assured his client that everything was under control. The next day Mr. Cornelsen purchased additional Burger King options.

When the deal became public the two men exchanged e-mails. Mr. Cornelsen sold his options, reaping profits of over $1.68 million. As in the first action, the Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e).

To resolve the case the defendants consented to the entry of permanent injunctions prohibiting future violations of the Sections cited in the complaint. The also agreed to disgorge the trading profits and pay prejudgment interest. In addition, Mr. Cornelsen agreed to pay a civil penalty of $3,362,180.

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by T. GormanPosted on Posted in SECActions

The SEC instituted administrative proceedings against the affiliates of five major accounting firms based in the Peoples Republic of China, or the PRC, which bodes ill for companies based there to have continued access the U.S. capital markets. In the Matter of BDO China Dahua CPA Co., Ltd., Adm. Proc. File No. 3-15116 (Dec. 3, 2012). The Order names as Respondents: BDO China, Ernst & Young Hau Ming LLP, KPMG Huazhen (Special General Partnership), Deloitte Touche Tohmatsu Certified Public Accountants Ltd. and PricewaterhouseCoopers Zhong Tian CPAs Ltd.

The proceeding is based on Rule 102(e)(1)(iii) which permits the Commission to temporarily or permanently deny any person found to have willfully violated or aided and abetted the violation of the Federal securities laws. Section 106 of the Sarbanes-Oxley Act of 2002, as amended by the Dodd-Frank Act, is alleged to have been violated. That Section provides that a PCAOB registered firm that audits the financial statements of a U.S. issuer consents to produce its work papers on request by either the Board or the SEC.

In this matter, each Respondent is registered with the PCAOB. Each Respondent is alleged to have have been engaged to audit the financial statements of a PRC based U.S. issuer. Each Respondent was served with a request by the Commission to produce all of its audit work papers for a designated period. Each Respondent declined, at least in part, based on their understanding that the law of the PRC precluded the production. The Order directs that a hearing be held before an ALJ to hear evidence.

This is not the first such proceeding by the Commission. Previously, a similar proceeding was instituted against the Deloitte PRC affiliate. In the Matter of Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Adm. Proc. File No. 3-14872 (May 9, 2012). That proceeding is also based on SOX Section 106 and Rule 102(e). That same firm is a defendant in a subpoena enforcement action brought by the Commission on essentially the same basis. SEC v. Deloitte Touche Tohmatsu CPA, Ltd., File No. 1:11-MC-00512 (D.D.C. Filed Sept. 8, 2011). That action was stayed earlier this year pursuant to a Commission request, citing on-going negotiations with a foreign regulator. The parties are due to report back to the Court in January.

To date the Commission’s efforts have been fruitless. If the impasse persists there may be a point at which PRC based companies are not be able to access the U.S. capital markets.

Program: Bloomberg Webcast: Current SEC Enforcement Trends (here)

Hurricane Sandy: As we enjoy the holiday season please remember the victims of Sandy’s destruction with a donation to the Red Cross (here).

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