by T. GormanPosted on Posted in SECActions

Periodically executives and regulators become concerned about short selling. During the recent market crisis, for example, the SEC placed limitations on selling the shares of financial institutions short. Although the directive was controversial, regulators in other country followed suit. As the current European bank crisis has unfolded, a ban on selling the shares of those institutions short has been imposed in local markets. No doubt the move is controversial with some arguing it is ineffective and others claiming it will prevent the share price of covered financial institutions from spiraling down as a result of short selling.

While the debate over short selling continues, the SEC settled with two defendants earlier this month who were charged with manipulative short selling. SEC v. Andreas Badian, Civil Action No. 06 CV 2621 (S.D.N.Y. Filed Apr. 4, 2006) is an action against Andreas Badian, an employee of unregistered investment adviser Rhino Advisors; three registered representatives then employed by now defunct Refco Securities, Jacob Spinner, Mottes Drillman, and Jeffrey Graham; and Pond Securities Corp., a registered broker dealer, along with two of its employees, Ezra Birnbaum and Shaye Hirsch. The complaint centers on a fraudulent short selling scheme alleged to have been conducted in violation of the antifraud provisions of the securities laws as well as other provisions.

Mr. Badian, acting for Rhino, directed the scheme to manipulate down the share price of Sedona Corporation, a Pennsylvania software company, according to the Commission. Under an agreement with Sedona, Amro International, S.A., a Rhino client, loaned Sedona $2.5 million. Three months later Amro was to be paid $3 million by Sedona. The agreement permitted Amro to convert Sedona’s debenture debt to shares of Sedona stock on certain specified dates. The lower the share price, the more shares Amro would receive.

To preclude Amro from manipulating Sedona’s share price, the agreement prohibited the company from selling Sedona’s shares short. Nevertheless, Mr. Badian directed defendants Spinner, Drillman and Graham to sell large amounts of Sedona stock to drive the price down. From March 1, 2001 through March 29, 2001 the defendants’ short selling of Sedona shares was responsible for over 40% of the total reported trading volume. As a result by March 23 the share price had deteriorated from an average closing price of about $1.43 per share in early 2001 to about $0.75 per share by March 23, 2001. Subsequently, Amro exercised its conversion rights and received over 1.6 million shares of Sedona stock in repayment of $1.1 million due under the Agreement.

Defendants Mottes Drillman and Jacob Spinner settled with the Commission. Each consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and Securities Act Section 17(a) and from aiding and abetting violations of Exchange Act Section 17(a). Each agreed to pay disgorgement of $4,000 representing their share of the ill-gotten gains, along with prejudgment interest and a civil penalty of $25,000.

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by T. GormanPosted on Posted in SECActions

Another defendant in the on going Galleon insider trading investigation was sentenced to prison. This time it was Jason Goldfarb who previously pleaded guilty. The court sentenced Mr. Goldfarb to three years in prison. U.S. v. Goffer, No. 1:10-cr-00056 (S.D.N.Y.).

Mr. Goldfarb was involved in the insider trading ring with former Ropes and Gray associates Arthur Cutillo and Brien Santarlas. In 2007 and 2008 Messrs. Cutillo and Santarlas furnished inside information on deals being handled by the firm to Mr. Goldfarb who is also an attorney. The inforation concerned the then pending deals involving 3Com Corporation and Axcan Pharma, Inc. Mr. Goldfarb in turn furnished that information to Zvi Goffer, known as Octopussy because of his multiple sources of information. The information was exchanged for cash. Mr. Goffer traded on the information and passed it on to others who also traded.

Messrs. Cutillo and Santarlas previously pleaded guilty to conspiracy and securities fraud charges in connection with the scheme. Mr. Cutillo was sentenced to thirty months in prison. Mr. Santarlas is scheduled to be sentenced on September 21, 2011. Mr. Goffer was convicted of conspiracy and securities fraud charges following a jury trial. He is scheduled to be sentenced on October 28, 2011.

Raj Rajaratnam’s Motion for Acquittal under Fed. R. Crim. Proc. 29 was denied in a ruling handed down on August 16, 2011. The found of the Galleon hedge funds was previously convicted when a jury returned a verdict of guilty on five counts of conspiracy to commit securities fraud and nine counts of securities fraud.

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