by T. GormanPosted on Posted in SECActions

The SEC and the New York Attorney General settled actions against a major Portuguese Bank based on violations of, respectively, the federal securities laws and the New York Martin Act. The Commission case centers on alleged violations of Securities Act Section 5, Exchange Act Section 15(a) and Advisers Act Section 203(a). The New York case is based on alleged violations of the broker dealer and investment adviser registration provisions of the Martin Act. In the Matter of Banco Expirito Santo S.A., Adm. Proc. File No. 3-14599 (Oct. 24, 2011).

Respondent BES is the principal subsidiary of Espirito Santo Financial Group, a Luxembourg based financial services business. BES is a commercial bank based in Lisbon, Portugal with more than 700 branches throughout the world. The bank does not have branches in the United States. It does however operate a money transmission service inn this country, Espirito Santo e Comercial Lisboa, Inc. or ESCLINC. BES also has a U.S. based wholly-owned subsidiary that is a member of FINRA and has been registered with the Commission as a broker-dealer since at least 2004. Its shares are listed on the Euronext stock exchange.

Beginning in 2004, and continuing through 2009, BES offered and provided brokerage services and investment advise to about 3,800 U.S. residents who were customers of the bank. Generally, those customers were Portuguese immigrants. These services were offered and provided from Portugal. The Departmento de Marketing de Comunicacao & Estudio do Consumdo mailed marketing materials to the bank’s U.S. based customers. A Portugal based call center serviced those customers. ESCLINC, which does have offices in this country, facilitated money transfers. That center also, from time to time, offered brokerage services to U.S. bank customers. None of the persons involved in these activities were registered as broker dealers or investment advisers with either the SEC or the State of New York.

Throughout the period BES offered and sold a variety of securities to its U.S. customers. Those included debt securities issued by entities such as Royal Bank of Scotland, HBOS plc, Lloyds Bank, Prudential, Limited Brands and others. The bank also marketed and sold debt and other group-guaranteed securities issued by BES and its affiliates, interests in Portuguese analogs to mutual funds (typically sponsored by BES or an affiliate), tax advantaged retirement products, and other securities. There was no registration statement filed or in effect for the securities issued or sponsored by BES or its affiliates. Likewise, registration statements were not filed or in effect for most of the other securities BES offered and sold to its U.S. customers.

In 2007 BES identified the need to comply with the laws of the jurisdictions in which it operated. The bank did not however undertake that analysis for the United States. Likewise, it did not use its wholly owned FINRA and Commission registered subsidiary to effectuate the transactions.

In May 2010 the bank self-reported following an internal investigation. Inquiries by the Commission and the State of New York followed. BES settled with the SEC, consenting to the entry of a cease and desist order based on the sections cited in the Order. The bank also agreed to pay disgorgement of $1,650,000 along with prejudgment interest and a civil penalty of $4,950,000. In addition, BES entered into a series of undertakings regarding its U.S. clients. To settle with the State of New York the bank agreed to the entry of a cease and desist order from further violations of the Martin Act along with certain sections of the Executive Law and will offer to make its customers whole for all securities unlawfully sold in addition to disgorging all profits. The bank will also pay a fine of $975,000. The disgorgement will be made to the SEC.

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by T. GormanPosted on Posted in SECActions

Insider trading is a key focus of SEC enforcement. With the formation of the market abuse unit which focuses on insider trading the Commission has been very aggressive. Not only has the Commission followed-up on inquiries initiated by the FINRA market surveillance unit, it has generated other inquiries from painstakingly analyzing trading data to identify potential repeat traders and other possible trends. While in many instances it is the high profile criminal charges which grab the headlines, SEC Enforcement has worked closely with criminal investigators and frequently has initiated the inquiry as it did with the investigation that lead to a guilty plea by an FDA chemist last week (here).

On Friday the SEC expanded its father-son insider trading action that centers on the acquisition of Mariner Energy by Apache Corporation in a deal announced on April 15, 2010. SEC v. Peterson, Civil Action No. 11-cv-5448 (S.D.N.Y. Filed Aug. 5, 2011). In the amended complaint the Commission added as defendants, Drew Brownstein, the founder and chief executive officer of the registered investment adviser and hedge fund management firm Big 5 Asset Management LLC and that firm.

The initial action centered on tips about the deal Clayton Peterson furnished to his son Drew. Clayton Peterson was the chairman of the audit committee and a member of the board of directors of Mariner Energy. Following the initiation of acquisition discussions in late March 2010, and prior to the April 2010 public announcement of the deal, Clayton Peterson repeatedly furnished information about the evolving transaction to his son, an investment adviser in Denver, Colorado. Drew purchased shares in several accounts. Following the public announcement of the deal the share price for Marine Energy rose 42%. Within days the accounts for which Drew Peterson had traded liquidated their positions, yielding a profit of about $150,000.

The Commission’s initial complaint alleged that Drew Peterson tipped a hedge fund manager who also traded. The unidentified hedge fund manager liquidated the positions taken in Mariner Energy for a $5 million profit. The amended complaint identifies that fund manager as a long time friend of Drew Clayton, Drew Brownstein and his fund Big 5 Asset Management.

Drew Peterson repeatedly tipped Mr. Brownstein about the impending acquisition according to the amended complaint. In their conversations Mr. Peterson told his friened that he should purchase the stock because his father had attended board meetings and “something good was going to happen for Mariner.” Mr. Brownstein subsequently purchased 200,000 shares or about $3.3 million worth of Mariner stock. Later the same day he bought 1,488 options on the stock.

Following additional conversations with Drew Peterson, Mr. Brownstein increased his option position, causing Big 5 funds to purchase a total of 2,512 contracts. He also caused his relatives to purchase a total of 25,000 shares of Mariner stock and 200 option contracts.

Additional conversations resulted in more purchases. Following a discussion between the two men on April 14, Mr. Brownstein purchased 200 option contracts for his account and increased Big 5 hedge funds’ position by acquiring an additional 1,000 options. The positions were liquidated following the announcement for a profit of almost $5 million.

Previously, the father and son pleaded guilty to criminal charges. Specifically, Clayton Peterson and his son Drew each pleaded guilty to criminal charges on August 5, 2011 of conspiracy to commit securities fraud and securities fraud. They are scheduled to be sentenced on January 12, 2012.

The amended SEC complaint against the Petersons, Mr. Brownstein and his hedge fund is pending. SEC v. Peterson, 11 Civ. 5448 (S.D.N.Y.).

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Each year Lexis takes nominations for and selects the Top 25 Business Blogs. Last year this Blog was honored to be among those selected. If you would like to nomine a blog please use the following link here.

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