by T. GormanPosted on Posted in SECActions

The SEC filed another “suspicious purchases” insider trading case. SEC v. Compania International Financier S.A., Civil Action No. 11 CV 4904 (S.D.N.Y. Filed July 15, 2011). Typically these cases are brought against “one or more unknown purchasers” of the securities of a take-over stock. Frequently, they involve traders who have taken huge positions in naked options shortly prior to the take over announcement. The Commission’s aggressive positions in the past have frequently paid off.

In this instance the Commission had more than in the typical “unknown trader” actions – it identified the corporate entities that made the purchases. The complaint, which alleges a violation of Exchange Act Section 10(b), centers on the July 11, 2011 announcement by Lonza Group Ltd. that it planned to acquire Arch Chemicals Inc. The former is a Swiss based company. The latter is based in Norwalk, Connecticut and its shares are traded on the New York Stock Exchange. Defendant CIF is a British Virgin Islands entity with offices in Geneva, Switzerland. The other defendants are Coudree Capital Gestion S.A. and Chartwell Asset Management Services, both based in Geneva, Switzerland. Yomi Rodrik, a Turkish national, is alleged to own and/or control CIF and Coudree. Mr. Rodrik has been “sued in the past by the SEC for trading violations.”

All of the trading in the case involved the purchase of the common shares of Arch between July 5 and 8, just days before the deal announcement. In that time period:

CFI for its own account made a purchase through one firm:

  • Bank of America/Merrill Lynch in London: July 5 – purchase 30,000 shares

Courdee for its own account made a purchase through the same firm:

  • Bank of America/Merrill Lynch in London: July 5 – 15,000 shares

CFI and Coudree made joint purchases through two firms on two dates:

  • Credit Suisse Securities Ltd, London: July 6 and 8: 460,000 shares
  • Raymond James: July 5 and 8: 107,000 shares

Chantwell made a purchase through one firm:

  • Chevreaux de virie, a Paris based broker with an office in London: July 5 and 8 – 425,300 shares

The complaint states that a search of available information establishes that there was no news of the take-over available prior to the deal announcement. It also alleges that multiple accounts were used to conceal the trading.

Despite having more information than in many similar cases whether the SEC can prevail in this action will involve the resolution of a number of issues evident from the face of the complaint. First, there is no obvious source of inside information. There is no allegation that any defendant had any apparent contact with either company. Second, while the trading positions standing alone appear significant, they are not the huge option purchases taken in many similar cases. Indeed, whether these positions are significant will depend on an analysis of the trading history of each trader and the reasons offered to buy the shares.

Third, while the complaint claims that there was no public information available about the deal prior to the announcement, there was clearly some reason to trade. The complaint admits that in the days leading to the take over the share price for Arch increased 21% to $42.17. In fact the pre-announcement increase appears to have been more significant than the one following the announcement which resulted in the share price increase about $5 to $47.37. The huge pre-announcement price run appears to be based on what economists call “leakage,” a occurrence which typically precedes a deal announcement. The pre-deal share price increase here certainly suggests that there were reasons to trade the shares of Arch in the days prior to the announcement.

Fourth, while the complaint suggests that both CIF and Coudree may have been traded by the same person no facts are alleged to support the supposition. The allegation that Mr. Rodrig controlled each entity is based on information and belief. There are no facts specified to support the supposition. Likewise there is no specific claim regarding who placed the trades or that the principals of CIF and Coudree knew anyone a Chartwell. And, while the complaint states that Mr. Rodrig has been the subject of a prior Commission suit the result is not stated.

Finally, there are no facts specified to support the “information and belief” claim that multiple accounts were used as a cover. Whether the Commission can prevail in this case as it has in others may well depend on its ability to discover the facts to support the assumptions in the complaint.

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by T. GormanPosted on Posted in SECActions

The SEC has in recent years suffered through its fair share of failures, blunders and gaffs. Indeed, there are times that it seems like this string will never end. At the same time it is important to view these incidents in context. The agency is responsible for regulating and policing markets which expand, innovate and change at a pace which far exceeds the ability of even the best government or private sector regulator to keep up. Nevertheless, the SEC has for most of its history been known as one of the best and most efficient regulators in government with a highly regarded enforcement program. Despite always being under funded and understaffed, the agency has effectively monitored increasingly complex markets and litigated with the best of the best that that a much better financed corporate America has to offer. Yet the gap between the resources the SEC needs and what congress is willing to fund for the tasks it demands done continues to widen.

Recently, the House appropriations committee voted to ax the SEC’s budget by $222.5 million. The proposal is to freeze the fiscal 2012. Setting aside the fact that the SEC has vastly expanded obligations under Dodd-Frank, if the goal is effective regulation and law enforcement, the wisdom of cutting an already inadequate budget is at best questionable. According to its report the Committee is concerned about recent errors as well as the SEC’s track record in dealing with Ponzi schemes. There is no doubt that the SEC failed to find Madoff. There is no doubt that the SEC failed to find Stanford and other Ponzi schemes. This however is in the past.

If bringing Ponzi scheme cases is the litmus test for more funding the Committee missed the mark – the SEC is entitled to a big budget increase. The House Committee need only briefly examined the current enforcement cases listed on the SEC’s website (or search the data base on this blog for “investment fund fraud”) to understand this point. Just last Thursday for example, the SEC filed an enforcement action against Jeffrey Lowrance and his entity, First Savings & Loan, Ltd. for operating an investment fund fraud. SEC v. Lowrance, Case No. CV 11 3451 (N.D. CA. Filed July 14, 2011).

The case is typical of the dozens and dozens the SEC has brought in recent months. Mr. Lowrance ran a fraudulent investment scheme which raised about $21 million from investors in 26 states. Like most of these schemes it promised steady returns. Some investors were told those returns were guaranteed through trading in a specialized foreign currency program. The false pitch line used by Mr. Lowrance was politics and Christian values. Defendant Lowrance assured investors he shared their Christian values. He also claimed to share views about limited government (perhaps to keep the DOJ and SEC away from his operation). Some investors were solicited through an advertisement in start-up newspaper, USA Tomorrow, distributed at a political rally in Minneapolis, Minnesota. Apparently investors were so taken with this sales pitch that even as the scheme began to unravel in 2008 – there were virtually no investments – over the next several months he was able to raise another $1 million from 36 investors. The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The SEC’s case is in litigation. Mr. Lowrance is also facing criminal charges now that he has been brought back from Peru.

Lowrance is just one of well over one hundred similar cases the SEC has brought in recent months. Thus if Ponzi scheme cases are the test, the SEC should get back all the money cut from its budget and more. More importantly, it makes no economic sense to cut the SEC’s budget. This is suppose to be a time of belt tightening and promoting efficiency. Yet as James B. Stewart points out in a recent excellent article in the New York Times (here) the SEC’s budget is fully paid for by the fees it charges. Not only that, the enforcement program generates billions of dollars in disgorgement, interest and fines, much of which goes to the U.S. treasury – it makes money for the government. In contrast, cutting the SEC’s budget means reducing fees and reducing cash paid to the U.S. treasury by the enforcement program.

In the end effective law enforcement and fiscal prudence dictates that the SEC’s budget be increased, not decreased. If there is any lesson to be learned from the recent market crisis it is that lax regulation and ineffective enforcement helps give birth to market calamity and fraud. If fiscal prudence and efficiency – getting “more bang for the taxpayer’s buck” – is the watchword, then enabling an agency like the SEC which has retooled its enforcement program and makes a huge profit should be a priority. This means that whatever errors the agency has committed, it is time to get over it. The mission of the SEC is far too important. Its time to enable the Commission by giving it the resources necessary to do the job congress has directed – bring a new ethics to the market place.

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