by T. GormanPosted on Posted in SECActions

The Commission has reportedly settled one of its earliest and most high profile market crisis cases, the action against former Bear Stearns fund managers Ralph Cioffi and Matthew Tannin. SEC v. Cioffi, Case No. 08-2457 (E.D.N.Y. Filed June 19, 2008). The SEC’s action was brought in tandem with a parallel criminal case against the two men. U.S. v Cioffi, 08-CR-001415 (E.D.N.Y.). In November 2009, prosecutors were stunned when a jury returned not guilty verdicts as to both defendants after only hours of deliberation.

Despite the repudiation of the criminal case, and reports of post trial juror interviews that were highly favorable to the defense, the SEC persisted with its case to the brink of trial. The action centered on the collapse in July 2007 of two Bear Stearns hedge funds once valued at about $20 billion tied to the subprime real estate market, the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund and the High-Grade Structured Credit Strategies Master Fund, Ltd.

The SEC’s complaint alleges an intentional fraud in which the defendants misrepresented the true condition of the two funds to investors as the market crisis began to unfold. The purpose was to prevent a run on the funds. Despite internal discussions regarding the fact that certain assets were over valued and a possible change in investment strategy, investors were told by the two managers that they were “very comfortable” with the investment strategy of the funds. Investors were not told the truth regarding the size and scope of the redemptions being demanded. Indeed, in May 2007 as the funds were collapsing the defendants continued to misrepresent the true financial condition of the funds, according to the SEC. Investors also were not told that Mr. Cioffi began moving about one third of his $6 million investment out to another fund. Investors lost about $1.8 billion when the funds collapsed.

The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). It seeks an injunction, disgorgement, prejudgment interest and civil penalties.

Under the terms of the proposed settlements, Mr. Coffi agreed to disgorge $700,000 and pay a $100,000 civil penalty. He will also be barred from the securities business for three years. Mr. Tannin will pay disgorgement of $200,000 and a $50,000 civil penalty. He will be barred from the securities business for two years.

The Court directed the parties to file papers regarding the arrangement next week. The SEC reportedly is pleased with the settlement. Judge Frederic Block, who is presiding over the case, stated that it is being settled for “relatively speaking, chump change,” according to a report published by Businessweek. The Judge indicated that he expected to sign off on the settlement.

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by T. GormanPosted on Posted in SECActions

Roomey Kahn, the former Intel executive turned government informant who helps spur the Galleon inquiry at the outset continues to aid enforcement officials in developing insider trading cases. Now she is a key witness against her neighbor and friend, Douglas Whitman, president and managing member of hedge fund investment adviser Whitman Capital LLP.

Mr. Whitman has been charged in a criminal insider trading complaint with two counts of conspiracy to commit securities fraud and two counts of securities fraud. U.S. v. Whitman, 12-cr-00125 (S.D.N.Y.). He and his firm have also been charged in a civil insider trading complaint alleging violations of Securities Act Section 17(a) and Exchange Act Section 10(b). SEC v. Whitman, Case No. 12-cv-01055 (S.D.N.Y. Filed Feb. 10, 2012). Both cases are pending.

The criminal and civil complaints allege insider trading in the securities of Polycom, Inc. and Google Inc.. Each complaint details allegations which echo those of earlier Galleon related cases. First, in January 2006 Ms. Kahn obtained inside information about Polycom’s calculation of its revenues and other financial results for the fourth quarter of 2005 from Sunil Bhalla, a senior executive at the company. Ms. Kahn traded on the information and passed it to others including Mr. Whitman who traded through his firm. As a result of the trading Whitman Capital obtained illegal trading profits of more than $360,000.

Second, Ms. Kahn obtained inside information about Google’s up-coming financial results from Shammara Hussain, an employee of Market Street Partners. That firm is an investor relations advisor for Google. Specifically, in July 2007 Ms. Hussain provided Ms. Kahn with details regarding Google’s calculation of its earnings for the second quarter of 2007 prior to the public disclosure of the information. Whitman Capital used the information to trade and made over $620,000 in illicit profits.

The criminal complaint also alleges that Mr. Whitman traded in the securities of Marvel Technology Group, Ltd. based on inside information, a charge not included in the SEC action. From 2007 through 2009 Mr. Whitman and his firm bought and sold Marvell stock and options based on inside information regarding the earnings and revenue of the firm, as well as other business information. That information was furnished by Karl Motey, an independent research consultant who is alleged to have obtained it from several Marvel employees.

Ms. Kahn previously pleaded guilty to insider trading charges and was sentenced to a term of probation. She has been assisting enforcement officials. Ms. Hussain has been named as a defendant in an SEC civil suit. To date the SEC has charged 30 persons in connection with its Galleon related investigation. The investigations are continuing.

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