by T. GormanPosted on Posted in SECActions

FDA chemist Cheng Yi Liang was named as a defendant along with his son Andrew Liang in a criminal insider trading complaint. U.S. v. Liang (D. Md. Filed March 29, 2011). The SEC filed a parallel action against the chemist. His son was only named as a relief defendant along with several others. SEC v. Liang, Case 8:11-cv-00819 (D. Md. Filed March 29, 2011). A civil forfeiture action was also filed regarding seven brokerage accounts, two bank accounts and two parcels of real estate alleged to have been involved with the illegal trades.

Mr. Liang has been employed at the U.S. Food and Drug Administration since July 2006. During that period he worked at the Center for Drug Evaluation and Research. The Center evaluates new drug applications before the product can be sold in the U.S. It either approves the request or issues a “complete response letter” specifying the difficulty. All of this information is non-public.

By accessing the Center’s confidential data, Mr. Liang was able to secure material non-public information about the application and a specific drug. In each instance he is alleged to have accessed the Center’s confidential information before engaging in a stock transaction involving the shares of a drug manufacturer. Mr. Liang is alleged to have purchased stock prior to the issuance of a positive announcement in 19 instances. On six occasions he sold stock short prior to the release of negative information. In two instances he was to avoid to trade and avoid a loss prior to the announcement.

In January 2011 HHS-OIG installed software on Mr. Liang’s work computer which allowed it to collect “screen shots,” according to the criminal complaint Shots from the computer show Mr. Liang accessing a secure Center data base to retrieve information about a drug. Within minutes several accounts controlled by Mr. Liang purchased shares in the manufacturer.

Mr. Lange is alleged to have traded through several different accounts. Shares were not purchased in his account. Rather, they were bought and sold through accounts of his son, wife, mother who resides in China and others. The SEC complaint details instances where trades in a particular stock were made sequentially for each account. On some occasions the trades came from the same IP address or one associated with Mr. Liang’s Verizon internet account.

Attached to the SEC complaint is a chart listing the stocks, the dates of the trades, the date and time of the FDA announcement and the trading profits or loss avoided. In most instances the trades began shortly before and continued up to and including the date of the announcement.

The criminal complaint charges the father and son with conspiracy to commit securities and wire fraud, securities fraud and wire fraud relating to their trading in the securities of five companies. The SEC complaint against the father alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). It is based on trading in advance of 27 announcements involving 19 stocks. All three cases are pending.

by T. GormanPosted on Posted in SECActions

The SEC obtained an emergency order halting the diversion of settlement payments from the Receiver of the Tom Petter’s Ponzi schemes. The money was intended to compensate defrauded investors of the feeder funds. The man who operated the feeder funds and helped facilitate the Petter’s fraud was poised to obtain the money until the SEC won a freeze order. Absent the order investors would have been paid nothing. SEC v. Quan, Case no. 0:11-cv-00723 (D. MN Filed March 24, 2011).

Defendant Marlon Quan is a hedge fund manager who operated Acorn Capital Group, LLC and Stewardship Investment Advisors, LLC, companies used to manage several hedge funds and both of whom are defendants. From 2001 through 2008 Mr. Quan raised over $459,077,561from at least 165 investors. Those investors and entities invested in Mr. Quan’s hedge funds. During that period Mr. Quan and his entities were paid over $93 million in fees.

From the beginning Mr. Quan’s funds fed millions of dollars of investor money to fraudster Tom Petters. Mr. Petters claimed to operate funds in which investor money was supposedly used to finance the purchase of merchandise for re-sale to “big box” retailers such as Wal-Mart and Costco. In reality Mr. Petters operated a massive Ponzi scheme, the assets of which have been seized by a Court appointed Receiver. During its operation however the Petters funds received millions of dollars from Mr. Quan and his funds in return for promissory notes.

When soliciting funds from investors Mr. Quan furnished them written materials which assured that the big-box retailers were making payments into a lock box which was controlled by one of his entities. He also told investors that a major accounting firm was retained to examine the books of the entities controlled by Mr. Petters, that there was insurance against default and that proper due diligence had been undertaken. These representations were false according to the Commission.

In 2007 when the Petters entities began to default on their notes Mr. Quan and his entities commenced a cover-up, concealing the truth from their investors. Those steps included falsely assuring investors that the Quan funds were in sound financial condition when in fact they were not.

Perhaps the ultimate fraud began as the Receiver for the Petters entites authorized the payment of $14 million which, according to the complaint, “belongs to the investor-victims of the Defendants’ fraud.” Instead, a Quan controlled entity negotiated a deal to obtain control of the funds and distribute them to others, including to Mr. Quan’s attorneys. The fund investors would receive nothing.

The SEC’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(4). The emergency order entered by the Court at the request of the SEC froze the settlement funds, preserving the money for the defrauded investors.