Insider trading has long been a staple of the Enforcement Division. Since the earliest days of the Division, and even prior to its formation in the early 1970s, the Commission has brought a series of cases that the courts used to etch the elements of the violation beginning with the a breach of duty tied to the broad language of Exchange Act Section 10(b). The most recent example of this evolution may be the first insider trading case based on crypto assets, SEC v. Wahi, Civil Action No. 2:22-cv-01009 (W.D. Wash. Filed July 31, 2022).

While the Commission’s most recent insider trading action is more straight forward, than Wahi, it is significant. SEC v. Mendwa, Civil Action No. 4:22-cv-05340 (N.D. Ca. Filed September 20, 2022).

Named as defendants are John P. Mendes and Andre Dabbaghian. Mr. Mendes was employed as a registered representative and investment adviser representative with a dually registered broker-dealer and investment adviser. Andre Dabbaghian was employed by Granite Construction Inc. during the period 2015 through mid 2018. He was the Senior Manager of Corporate Development. Mr. Dabbaghian had formerly been registered with FINRA and employed as an investment banking analyst.

The case centers on the acquisition of Layne Christensen Company by Granite in a deal announced on February 14, 2018. Prior to the deal announcement Defendant Dabbaghian learned of the potential deal regarding Layne and Granite through his employment. At the time he acquired the material, non-public information, Mr. Dabbaghian owned a duty of confidentiality to his employer. Stated differently, he owed a duty not to disclose the information – it belonged to Granite, not Defendant Dabbaghian.

Nevertheless, Defendant Dabbaghian disclose information about the potential merger to his friend John Mendes on or before November 3, 2017. Following the disclosure Mr. Mendes purchased shares of Layne securities for his wife and at least 18 other customers, including his parents, beginning on November 3, 2017 and through November 13, 2017.

On November 14, 2017, the day after the deal announcement, the share price of Layne shares closed at $14.89. That represented a price increase of $2.27 per share – up 18% from the close the prior day. Collectively, the persons for whom Mr. Mendes purchased shares had profits of about $170,000. The complaint alleges violations of Exchange Act Section 10(b).

Each Defendant resolved the charges with the Commission. Mr. Mendes consented to the entry of a permanent injunction based on the Section cited in the compliant. He also agreed to pay disgorgement of $41,985, prejudgment interest and a civil penalty of $51,579. Defendant Dabbaghian consented to the entry of a permanent injunction based on the Section cited in the complaint and agreed to the entry of an officer/director bar. The Court will consider the amount of the penalty, if any, at a later date. See, Lit Rel. No,. 25512 (September 20, 2022).

Print Friendly, PDF & Email
Tagged with: ,

The Division of Examinations issued a Risk Alert on September 19, 2022 focused on Advisers Act Rule 206(4)-1, the Advertising Rule, adopted on December 22, 2020. The Rule becomes effective on November 4, 2022 (here). Advisers can adopt the Rule prior to that date if all of its provisions are included in the advisers’ policies and procedures.

The new Marketing Rule replaced a number of rules with what is now one Rule. The Risk Alert begins by cautioning advisers to consider “whether they need to update or revise their written policies and procedures” to make sure that they not only reflect the teachings of the new Rule but also properly implement them. The Division cautions that advisers should also review the impact of the new Rule on other books and records provisions as well as Form ADV.

The Risk Alert is divided into four key areas:

1) The Rule policies and procedures: Here the Division focuses on two key themes of the new Marketing Rule – objective and testable policies and procedures. Specifically, in the Rule release the Commission stated its belief that “for these compliance policies and procedures to be effective, they should include objective and testable means reasonably designed to prevent violations of the final rule in the advertisements the adviser disseminates . . .” Thus, for example, an adviser might conduct pre-review testing to ensure compliance.

2) Substantiation requirement: Key to any reasonable belief of the adviser is the ability to offer substantiation for the belief. Having a reasonable basis for a belief is essentially a function of the objective and testable notions discussed above. The Commission described it this way in the Release: the adviser “could make a record contemporaneous with the advertisement demonstrating the basis for their belief. The Adviser might also choose to implement policies and procedures to address how this requirement is met.” If the adviser cannot substantiate its claims, the Risk Alert notes that the Division will presume the adviser did not have a reasonable belief.

3) Performance advertising requirements: Part of complying with the Marketing Rule which the Division will test is complying its prohibitions. Those include:

a. Using gross performance in an advertisement unless it also includes net performance;

b. Including performance results unless they are for specific time periods, although this does not apply to private funds;

c. Making any statement that the Commission has approved or reviewed the calculation, presentation or results;

d. If the advertisement includes the performance of portfolios other than the one being advertised, including performance results from fewer than all portfolios with similar investment policies, with limited exceptions;

The focus of the Alert is to encourage advisers to carefully reflect on their policies and procedures in the area in view of the new Marketing Rule.

Print Friendly, PDF & Email
Tagged with: , ,