by T. GormanPosted on Posted in SECActions

Insider trading has long been an SEC enforcement priority. While the Manhattan U.S. Attorney has brought the headline grabbing cases, the SEC has been equally aggressive in a series of actions which may redefine the insider trading (here). This has been a strength of the retooled SEC enforcement program.

Once again however the past may be returning to tarnish the future. Fresh from testimony before law makers about the alleged Stanford Ponzi scheme (here), the Commission now has an inquiry about how it handled FINRA “suspicious trading” referrals. Specifically, Senator Charles Grassley, in a May 24, 2011 letter to SEC Chairman Mary Schapiro, is asking the Commission to explain how it has handled possible insider trading inquiries about SAC Capital referred by FINRA beginning as early as January 1, 2000. The letter goes on to request that the Commission explain: “(1) how the SEC resolved each of these referrals, (2) how the number of referrals over this timeframe compares to similarly situated firms, (3) whether a Wells Notice was ever drafted with regard to SAC Capital related to any of these referrals or related to any other matter (if so, please provide a copy of any Draft or Final Wells Notice).” The letter attaches a list of the referrals.

Previously, the Senator requested and obtained information from FINRA about referrals relating to possible insider trading by SAC Capital. According to the Wall Street Journal FINRA turned over the details regarding about 20 instances when it found trading by the hedge fund to be suspicious.

FINRA of course routinely monitors the markets and makes referrals of suspicious trading to the SEC. Suspicious trading is just that. It is not insider trading. At the same time Bloomberg reports that the Manhattan U.S. Attorney is investigating accounts at SAC Capital tied to Noah Freeman and Donald Longueuil, former portfolio managers who pleaded guilty to insider trading charges.

Senator Grassley’s interest in insider trading dates to at least 2006 when he was critical of the SEC in the Pequot Capital Management debacle (here). Three years after Senator Grassley called on the SEC to reopen its investigation of the hedge fund, Pequot and its owner settled insider trading charges with the Commission (here).

On June 7 when the response is sent by the Commission to Senator Grassley it will detail how the FINRA referrals were handled and resolved. That response may suggest whether the enforcement program is going to continue moving forward or stay mired in the past (here).

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by T. GormanPosted on Posted in SECActions

Earlier this month Commission officials testified on Capitol Hill regarding the failure of the agency to investigate the alleged Stanford Ponzi scheme at an earlier date. Lawmakers were assured that a series of steps have been taken to preclude a repetition of such conduct in the future. The focus of these steps is to protect investors from such fraudsters.

By all accounts those steps have been more than effective in finding and bringing investment fund cases. Since Madoff and Stanford the Commission has brought a series these cases. Two more of were filed on Friday, one which looks like most others and one which differs although in both the investors lost. SEC v. Vulliez, Civil Action No. 11-cv-3458 (S.D.N.Y. Filed May 20, 2011) is an action against investment adviser Christopher Vulliez and his firm Amphor Advisors, LLC. The court papers claim that between March 2010 and January 2011 the defendants raised over $700,000 from his close family members and friends. The money, along with investments by Mr. Vulliez, was suppose to be put in a biotech company. The investments were never made. Just where the money went is not specified although what ever remains has been frozen by the court.

The Commission filed a complaint alleging violations of Securities Act Sections 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2). The action is pending.

The second is SEC v. Wallace, Civ. Action No. 4:11-cv-01932 (S.D. Tx. Filed May 20, 2011). The defendants are Huston area real estate developers, David Wallace and Costa Bajjali. According to the court papers, from November 2006 through December 2008 the defendants sold interests in the Wallace Bajjali Investment Fund II, L.P. and the Laffer Frishberg Wallace Economic Opportunity Fund, L.P. through their efforts and the recommendations of an unnamed investment adviser who appears to be Daniel Frishberg. According to the private placement memoranda the funds would limit their investments to more than, respectively, 33% and 20% of any one business. Both significantly exceeded the concentration limitations by heavily investing in Business Radio Networks, L.P. or BizRadio. The complaint describes this entity as a “struggling media company.”

There is no allegation the either defendant did any due diligence before putting much of the money investors entrusted to them into BizRadio although it seems likely Mr. Frishberg played a role. There is also no allegation that the defendants absconded with all or even part of the money. In fact there is no indication of what happened to any of the investor funds beyond putting substantial portions of it into BizRadio.

Two earlier SEC cases involving BizRadio suggest that the investments have been largely lost. One names as a defendant Daniel Sholom Frishberg who is also the CEO of the company. That action involved, in part, the sale of notes in 2008 and 2009 from BizRadio. According to the Commission, investors purchased the notes without being told that there was little likelihood they would be repaid because of the condition of the company.

In another Commission enforcement action BizRadio was named as a relief defendant. The complaint alleged the company had been the recipient of part of the money from the fraudulent sale of notes by a Frishberg associate (both cases which raise other significant questions, are discussed here). Since BizRadio seems to be little more than a pawn used to facilitate fraud with some connection to Mr. Frishberg it seems unlikely that the investors in Wallace will recover much of their hard earned money – or at least the substantial part put into BizRadio.

Wallace only alleges violations of the investment limitations in the PPMs. It settled with consents by both defendants to the entry of permanent injunctions by each which preclude future violations of Securities Act Sections 17(a)(2) and 17(a)(3). Each defendant also agreed to pay a civil penalty of $60,000. No disgorgement was ordered.