by T. GormanPosted on Posted in SECActions

Insider trading has long been a key focus of SEC Enforcement. While some cases are complex others are relatively straight-forward. For example, a recent international insider trading action involved over 3,000 securities with traders in multiple countries. The analysis of the transactions required a high degree of sophisticated data analysis.

Others are more straight forward but nevertheless, difficult to detect and prove. The Commission’s most recent case in this area is an example. There a group of friends clustered around a corporate insider traded on inside information in the firm’s securities for years before being detected, apparently by happenstance. Nevertheless, they were uncovered and named as defendants in a Commission enforcement action. SEC v. Nellore, Civil Action No. 5:19-cv-08207 (N.D. Cal. Filed Dec. 17, 2019).

Defendant Janardhan Nellore, the IT administrator of Palo Alto Networks, Inc., a cloud computing firm based in Santa Clara, was at the center of the insider trading ring. Involved as tippees, and also named as defendants, were four friends, three from working at the firm — defendant Sivannorayana Barama, a software engineer, Saver Hussain, an IT consultant who was not just a friend but had financial ties with Mr. Nellore, and Prasad Malempati. Defendant Ganapathi Kunadharaju, another Santa Clara software engineer was a friend of Mr. Nellore from college in India.

From about 2015, when Mr. Nellore received a promotion at his firm that gave him greater access to information, until about 2019 when he was arrested for identity theft when trading through the account of another, Mr. Nellore and his friends repeatedly traded on inside information he obtained through his position at work. At their peak the men had about $7 million in trading profits.

After being at Palo Alto Networks for about three years Mr. Nellore received a promotion after which the ring began trading. In 2015, for example, Mr. Kunadharaju granted his friend electronic assess to his securities trading accounts. Mr. Nellore explained that he would use the access to conceal his trading. He also agreed to furnish the inside information to his friend. The trading profits were divided such that each man kept the profits generated by the money he put in the accounts. In addition, Mr. Kunadharaju periodically withdrew sums under $10,000 from the accounts to give to his friend. Mr. Nellore entered into a similar arrangement with Mr. Hussain.

In contrast, Mr. Nellore regularly tipped Mr. Malempati in return from market information developed by his friend to inform and aid his trading. Mr. Barama, on the other hand, was gifted the inside information, according to the complaint.

The trading patterns over the years appeared to have been largely the same. Mr. Nellore would communicate the information to each of this friends who traded. Frequently, prior to a trade there would be a number of communications about the transaction. While at first the men would refer to the firm’s shares by company name, later they referred to the stock as “baby.” At Mr. Nellore’s directions, the men also traded options to maximize the profits.

An example of the trading involved the transactions executed prior to the company earnings announcement on November 21, 2016. In this instance Mr. Nellore obtained confidential information regarding the firm’s earnings and performance for the first quarter of 2016 three days prior to the announcement. The next morning Defendants Nellore, Barama and Kunadharaju began trading options. At 6:41 a.m. Mr. Barama placed an order for 72,000 put options. Two minutes later Mr. Nellore paid about $14,000 to acquire options in the account of Mr. Kunadharaju. Mr. Nellore then talked on the phone with Mr. Barama and the Mr. Kunadharaju just after 11:00 a.m.

Subsequently, the company announced disappointing earnings on November 21, 2016 at about 1:00 p.m. The share price declined about 13%. Defendants Nellore, Barama and Kunadharaju sold the options over the next two days reaping profits of over $200,000. The complaint alleges violations of Exchange Act Section 10(b) and for aiding and abetting. The case is pending. The U.S. Attorney’s Office for the Northern District of California announced parallel criminal charges against Messrs. Nellore and Barama.

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by T. GormanPosted on Posted in SECActions

p>As the Commission focuses on retail investors, offering fraud actions have proliferated. In those cases, small investors are typically defraud by being induced to enter into what appears to be a very attractive deal. Later the investors learn the deal was actually a fraud.

In contrast, the Commission’s most recent investor fraud action does not center on an offering fraud. To the contrary, the wrongful scheme is conducted largely from the top, through control, by a board member and CEO. It centers on two fraudulent schemes involving REITs and BDCs. The result is the same however – the fraudster takes the investor cash. SEC v. Singal, Civil Action No. 19-cv-11452 (S.D.N.Y. Filed Dec. 13, 2019).

Defendants are Suneet Singal, First Capital Real Estate Trust Inc. or FC REIT, First Capital Real Estate Advisors, LP or FC REIT Advisors, and First Capital Real Estate Investments, LLC or FC Private. Mr. Singal is the CEO and Chairman of FC REIT, the CEO and beneficial owner of FC REIT Advisor and a minority owner of FC Private. FC REIT is a public, non-traded REIT advised by FC REIT Advisor which is beneficially owned by Mr. Singal. FC Private operates as a commercial real estate firm and the holding company for several of Mr. Singal’s businesses.

On September 15, 2015 Mr. Singal entered into a transaction with FC REIT in which he supposedly contributed over $41.7 million in real estate interests to the firm in exchange for about 3.3 million OP Units or shares of FC REIT’s common stock at a price of over $12 per unit. The properties were contributed because Mr. Singal did not have the cash to close the transaction.

The difficulty was that Mr. Singal did not actually own the properties – he did not have the authority to contribute them to the deal. To the contrary, some of the hotels involved were in bankruptcy and could not be sold. Nevertheless, they involved documents representing that Mr. Singal owned them and had “good and marketable” title. Indeed, the day after the transaction, a side letter was executed with one of the Hotel Principals listing the steps needed to close. Yet later in September Mr. Singal and FC REIT filed a Form 8-K regarding the transaction which was later amended. It stated that the deal was done – it materially misrepresented the deal as essentially having occurred.

Subsequently, Mr. Singal continued his efforts to acquire the hotel properties. By year end however, he abandoned the quest. Additional misrepresentations regarding the deal were made, however, in subsequent firm filings with the Commission. The NAV for FC REIT was also misstated and overvalued because of what was actually a sham transaction.

By the fall of 2016, Mr. Singal’s FC Private and its subsidiaries had significant cashflow issues. After acquiring ownership interests in two BDCs, Mr. Signal had them execute two lending agreements for $1.5 million each. The loans were extended to firms Defendant Singal controlled. Mr. Singal diverted about half of the funds to his personal use. Nevertheless, Mr. Somgal continued to conceal the true nature of the transactions. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 15(d), Advisers Act Sections 206(1) and 206(2) and Investment Company Act Sections 57(a)(3) and (4). The case is pending. See Lit. Rel. No. 24619 (Dec. 16, 2019).

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