by T. GormanPosted on Posted in SECActions

The family that works and perhaps plays together, stays together. That may also apply to those who are long time, close friends. The close friends that play together stay together. This is the theme of the SEC’s most recent insider trading case. The close friends who invested together over the years to build the company continued to invest as key take-over deal was put together and executed. While working and playing together is great in lots of context, here the Commission calls it insider trading. SEC v. Sarshar, Civil Action No. 20-cv-06965 (S.D.N.Y. Filed August 25, 2020).

Defendant Sepehr Sarshar is the founder of Auspex Pharmaceuticals, Inc., a California based biopharmaceutical firm that has focused on drug development since its founding in 2001. By 2014 the firm secured a listing for its securities on NASD following an IPO at $12 per share.

During the thirteen years it took to achieve the exchange listing and IPO, Mr. Sarshar and his firm did repeated capital raises. The investors were family and friends. Investor A, for example, was his romantic partner. Investor E was his brother. Investors B and C were long-time friends from college. Investor D was a years-long surfing partner. Investor F is Investor E’s domestic partner. During the period the group members used an investment vehicle to put their money into the fledgling firm.

In early 2015 the CEO of Auspex began meeting with senior management from a number of large pharmaceutical companies. The firms including Israel based Teva Pharmaceutical Industries Ltd., a global pharmaceutical company whose shares are listed on the New York Stock Exchange.

The prospects for a deal moved forward quickly. Multiple firms expressed interest in doing a deal. Auspex retained an investment bank in February 2015. Later the same month Teva submitted a non-binding proposal to Auspex for an all-cash tender offer at a 30% premium to market. Conditional agreements were executed by March 1, 2015. The Auspex board was interested, a fact noted at its late February meeting.

As the deal unfolded Mr. Sarshar emailed the investment group – Investors A – F. He had, of course, been kept abreast of the potential deal talks. The email explained to the group that since he remained on the board of directors of the company he was not allowed to communicate with anyone about non-public events.

On the morning of February 24, 2015 Mr. Sarshar learned that Teva had submitted a non-binding proposal to acquire the company. Mr. Sarshar texted Investor A – his romantic companion – for 20 minutes. Investor A finished the communications and called her employer’s 401(k) Plan administrator about moving funds to her self-directed brokerage account. She asked Mr. Sarshar that for investment advice. He agreed. About one month later, as the deal between the two firms was progressing, and after chatting with the CEO of Auspex, she purchased additional shares in the firm.

On March 30, 2015 Auspex announced that Teva Pharmaceutical had commenced a tender offer to acquire Auspex for $101 per share, a premium of 42% above the closing price from the prior day. Prior to that announcement Investors B, C, D, E and F each added to their share-holdings in Auspex under circumstances that are similar to those which lead to Investor A purchasing more stock. The group had trading profits of at least $300,000.

Subsequently, the NASD conducted a preliminary investigation into the trading of Auspex shares prior to the deal announcement. During the inquiry Mr. Sarshar stated he had not had contact with the other Investors during the period except his brother, Investor E. The statement was false, according to the complaint. The complaint alleges violations of Exchange Act Section 14(e). The case is pending. See Lit. Rel. No. 24876 (August 25, 2020).

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by T. GormanPosted on Posted in SECActions

Due diligence is always the key when making an investment. Regardless of who is making the solicitation or how well the potential investor may think they know the broker, firm or security, it pays to stop, evaluate the potential investment and then move forward if appropriate. In the end no matter how many cases regulators such as the SEC or FINRA bring, regardless of how extensive the investor education programs are, it is the investor who must make the final decision to put his or her capital at risk. And, of course if there is no risk, or the investor believes for some reason there is no risk, then there is no actual investment. Yet many skip the due diligence which may well have been how the defendants in the Commission’s latest enforcement case were able to raise millions of dollars supposedly for an offshore investment fund and themselves that was actually a sham. SEC v. Hede, Civil Action No. 1:20 – cv-06724 (S.D.N.Y. Filed August 21, 2020).

Defendants Minish “Joe” Hede and Kevin Graetrz were each employed at a Broker-Dealer Firm from February 2013 to April 2017. Each was terminated for failing to cooperate with an investigation by their employer into selling away – selling securities not authorized by Broker-Dealer Firm.

Broker-Dealer Firm was registered with the SEC and FINRA. Neither Defendant was registered with either the Commission or FINRA. In 2013 Mr. Borland began approaching others at the firm to act as placement agents for Off-Shore Country Fund. Mr. Graetz furnished the introductions. As with other brokers, Broker-Dealer Firm had written policies that prohibited registered representatives from offering and selling any investment to firm customers absent approval by the Firm. Since the Firm had not approved selling interests in Off-Shore Country Fund, each Defendant was prohibited from engaging in such activities.

FINRA rules also require that representatives such as Messrs. Hede and Graetz sell all securities to customers through the broker-dealer firm for which they are employed. If Defendants wanted to sell interests in Off-Shore Country Fund each was required to seek and obtain the authorization of the Firm. Neither Defendant provided notice to Broker-Dealer Firm regarding selling interests in Off-Shore Country Fund, a practice which if permitted is known as “selling away.”

Nevertheless, each Defendant began selling interests in the Fund. Approximately $9.6 million was raised from 21 customers of Broker-Dealer Firm by selling interests in Off-Shore Country Fund. Steps were taken to conceal the activity from their employer. Yet in December 2016 the Firm received a demand letter from one of its customers who had purchased notes in the Fund. The customer informed the Firm that Messrs. Hege and Graetz had urged him to purchase the notes.

In 2018 the U.S. Attorney’s Office for the Southern District of New York filed a complaint and indictment against Mr. Borland, alleging conspiracy, securities fraud and wire fraud in connection with selling interest in the Fund. U.S. v. Borland, No. 18-cr-00487 (S.D.N.Y). At the same time the SEC filed an enforcement action naming as defendants Mr. Borland, the Fund and others. SEC v. Borland, Civil Action No. 18-cv-4352. Each case alleges that Mr. Borland misappropriated millions of dollars supposedly to be invested in the Fund. In February 2019 Mr. Borland pleaded guilty to criminal charges in the criminal case. The complaint alleges violations of Exchange Act Section 15(a). The case is pending. See Lit. Rel. No. 24873 (August 24, 2020).

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