by T. GormanPosted on Posted in SECActions

Market professionals continue to be the focus of insider trading actions. This time it is an associate in the Investment Banking Group of Wells Fargo Securities, John W. Femenia, who is alleged to be at the center of a ten person, serial insider trading ring. SEC v. Femenia, Civil Action No. 3:12 cv 803 (W.D. N.C. Filed Dec. 5, 2012). Mr. Femenia was resident in the Charlotte office for three of the four deals involved in the action and in the New York City office at the time of the last transaction.

Other defendants include: Shawn Hegedus, a registered representative and long time friend of Mr. Femenia who is alleged to have been tipped by him; Aaron Wens and Matthew Musante, two other friends alleged to have been tipped by Mr. Femena; Anthony Musante, father of Matthew, also alleged to have been tipped by Mr. Femena; Danielle Laurenti, the girlfriend of Mr. Hegedus who is alleged to have tipped her along with four of his business colleagues, Roger Williams, James Hayes Iv, and Kenneth Raby.

The case centers on four take-over transactions in which Wells Fargo was involved:

  • The acquisition by GENCO Distribution Systems of ATC Technology Corporation, announced on July 19, 2010;
  • The purchase by Rock-Tenn Company of Smurfit-Stone Containers Corporation announced on January 23, 2011;
  • The acquisition of K-Sea Transportation Partners by Kirby Corporation, announced on March 13, 2011; and
  • The purchase of The Shaw Group by Chicago Bridge & Iron Company, announced on July 30, 2012.

While Mr. Femenia is alleged to have been the ultimate source of information on each transaction, there is no allegation in the complaint that he worked on any of the four deals. Rather, the complaint makes vague statements claiming that he learned about the deals through his work or misappropriated the inside information. For example, in discussing the GENCO-ATC transaction the complaint alleges that “Sometime between December 2009 and March 2010, Femenia learned about the potential acquisition of ATC –either in the course of his duties as an employee of Wells Fargo Securities or through the misappropriation of such information from a Wells Fargo Securities colleague and/or confidential documents.” At the same time, Mr. Femenia was not resident in the same Wells Fargo office for all of the deals, according to the complaint.

Likewise, many of the supporting details about the ring participants are based on “information and belief” with, at times, few supporting details. The complaint does recite repeated trading, at times in options, and phone calls involving various participants.

The ring participants are alleged to have netted about $11 million in illegal profits. The complaint alleges violations of Exchange Act Section 10(b). The case is in litigation.

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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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.

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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