by T. GormanPosted on Posted in SECActions

Sometimes people are lucky. Everything goes just right. Sometimes a mistake but there are few if any real consequences. Other times the mistake has a significant impact. Even in those instances, however, over time the consequences may fade into the past along with many other things that nobody wants remembered. That may turn out to be the situation for the defendant in the Commission’s most recent insider trading case – or maybe not. SEC v. Tsai, Civil Action No 1:19-cv-07501 (S.D.N.Y. Filed August 12, 2019).

At the age of 23 Bill Tsai seemed to have it all. He was a college student moving toward graduation. He had a summer internship at an International Investment Bank in New York City. The position gave him the opportunity to watch and learn first hand about big time financial transactions.

Bill took the firm’s employee training course. The young intern learned that he was subject to the Bank’s confidentiality policies. The information that was part of his job was non-public, material and highly confidential he was instructed. It was imperative that the intern carefully follow the firm’s policies and procedures regarding the information – a failure would not just violate the Bank’s rules, but possibly the federal securities laws. Bill was working on mergers and acquisitions.

As the summer drew to a close the internship ended. It was almost mid-August 2017. The day after it terminated Bill was handed an offer letter for a full-time position as an analyst at the Investment Bank. The position would start after his anticipated graduation from college in May 2018. The offer letter reiterated what he had learned earlier – confidentiality was essential and trading on inside information prohibited. The eager intern accepted the offer.

Following graduation Bill Tsai began his new career. It was July 2018. The Bank had him execute a copy of its confidentiality and insider trading policy. Over the next year he would be schooled in the policies no less than five times.

A second part of the firm’s compliance procedures focused on securities accounts. From the outset it was made clear that he was required to disclose any existing brokerage accounts, trade only through two specific, authorized broker-dealers and preclear all trades through the compliance department. Although Mr. Tsai had a brokerage account at a firm that was not authorized, when he was filling out all the new employee firms he checked the box representing that he did not have such an account. In another section of the documents which also called for disclosure of the unauthorized account he again failed to disclose it as required.

During his work at Investment Bank Bill Tsai was essentially in a stream of material non-public deal information. On March 11, 2019 he received an email inviting him to participate in the tech team’s portfolio review meeting. The transaction list attached to the email list listed a pending leveraged buyout by Firm A, by a Client of the Bank. The target date was only a couple of weeks away.

Although the target date for the LBO passed, Mr. Tsai continued to see Client on the “pipeline” report – a listing of pending deals. A key internal report available to Mr. Tsai showed that the LBO deal was up for committee approval in late March with closing for the financing set for April 30, 2019.

On March 29 Bill Tsai began buying options of Client. He continued to build his position through the first part of April. All purchases were in the unauthorized account.

On April 15, 2019 Firm A announced the deal prior to the market open. It was an all cash transaction for $1.7 billion. Trading volume spiked up. Mr. Tsai liquidated his position, reaping profits of over $98,000. The complaint alleges violations of Exchange Act Section 10(b). That case is pending. The U.S. Attorney’s Office for the Southern District of New York announced a parallel criminal case. That case is also pending.

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by T. GormanPosted on Posted in SECActions

A look forward; a look back:

While many agencies such as the Commission repeatedly state that the number of cases filed or dollars imposed by judgments is not determinative of whether their enforcement program is effective, as the government fiscal year draws to a close, those and other metrics become key. At year-end those metrics are incorporated in the annual report. After year-end they are used in Congressional testimony in budget hearings to argue for more resources. If history is any guide, over the next several weeks the number of SEC enforcement actions filed will increase significantly.

As the fiscal year end approaches also expect the current trends in the type of cases, and the forum in which they are filed by the Commission, to continue. Thus, expect to see a series of offering fraud and microcap fraud cases filed in federal court. Past trends also suggest that over the next few weeks there will be a series of actions brought involving investment advisers. That trend has been developing over the past several years and, in accord with the Commission’s current “main street investors” focus, accelerating. The contested cases will in all probability be filed in federal court, consistent with post Lucia trends. Overall, these trends suggest a busy few weeks for the enforcement division.

SEC

Update rules: The Commission approved a proposal to modernize the disclosure rules for business, legal proceedings and risk factors under Regulation S-K on August 8, 2019 (here).

Rules: The Commission adopted amendments to codify an existing exemption for credit rating agencies registered with the agency as NRSROs on August 7, 2019 (here).

Event: Chairman Jay Clayton announced an event for main street investors that will be held in Chicago on August 15, 2019 (here).

Securities Class Actions

The pace at which securities class actions are being filed has been at near record levels through the first half of 2019, according to a report issued by Cornerstone Research titled Securities Class Action Filings, 2019 Midyear Report (here). During the first half of 2019, 198 securities class actions were filed. That exceeds the 204 filed during the same period in 2018 but is less than the 223 initiated in 2017. The number of M&A filings declined to 72 during the first half of 2019 compared to 91 during the same period in 2018 and 2017. The Third Circuit had the most M&A filings at 50 compared to 23 during the same period in the prior year and 23 in 2017.

SEC Enforcement – Filed and Settled Actions

The Commission filed 3 civil injunctive actions and no administrative proceedings this week, exclusive of 12j and tag-along actions.

Offering fraud: SEC v. Farish, Civil Action No. 4:19-cv-623 (N.D. Tx. Filed August 8, 2019) is an action which names as defendants Jerry Lee Farish and New Summit Homes, Inc., respectively, a long-time commercial airline pilot and his firm which owned real estate in Texas. For over one year, beginning in March 2016, Mr. Farish marketed interests in New Summit to his fellow pilots and others with the promise that homes would be built in Westlake, Texas. Investors were promised a substantial return. In fact, Defendants sold one lot to three different investors, co-mingled the investor capital and diverted the approximately $1 million raised to personal use. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 2455 (August 8, 2019).

Insider trading: SEC v. Avent, Jr. , Civil Action No. 1:16-cv-02459 (N.D. Ga.) is a previously filed action which named as a defendant Thomas Avent Jr., a partner at an international accounting firm. This week the Court entered a final judgment against Mr. Avent by consent, enjoining him from future violations of Exchange Act Sections 10(b) and 14(e) and directing him to pay a civil penalty of $125,000. A related administrative order permanently bars him from appearing or practicing before the Commission. The complaint in the enforcement action alleged that Mr. Avent learned about three different corporate-takeover transactions through his work. Prior to each he tipped his broker who traded and tipped others. See Lit. Rel. No. 24554 (August 7, 2019). See also In the Matter of Thomas W. Avent, Jr., CPA, Esq., Adm. Proc. File No. 3-19322 (August 7, 2019).

Offering fraud: SEC v. Kabra, Civil Action No. 1:19-cv-116776 (D. Mass. Filed Aug. 5, 2019) is an action which names as defendants Tanmaya Kabra and Launchbyte.IO. The now defunct firm was managed by Mr. Kabra. Over a one year period, beginning in June 2018, defendants deceived investors into purchasing shares in the firm largely through false promises of double digit returns. While the story told to each investor varied, generally it centered on acquiring interests in start-ups. The investor funds were either misappropriated or used to make Ponzi type payments. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. A parallel criminal action was filed by the U.S. Attorney’s Office for the District of Massachusetts. See Lit. Rel. No. 24553 (August 6, 2019).

Shell creation factory: SEC v. Husain, Civil Action No. 2:16-cv-03250 (C.D. Cal.) is a previously filed action which named as defendants attorney Gregg Jaclin and Imran Husain. The action centered on the operation of a fraudulent shell creation firm. The complaint alleged that the two Defendants created nine fraudulent shell companies that were eventually sold. Mr. Jaclin was indicted in a parallel criminal action that included charges of obstructing an SEC investigation. Attorney Jaclin resolved the Commission’s action, consenting to the entry of a cease and desist order based on Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). He also agreed to pay disgorgement and prejudgment interest of $40,473 and to the entry of a penny stock bar. No penalty was imposed in view of the anticipated sentence in the criminal action. He also agreed to the entry of an order in an administrative proceeding denying him the right to appear and practice before the Commission as an attorney. In the Matter of Gregg Evan Jaclin, Esq., Adm. Proc. File No. 3019312 (Aug. 6, 2019). See Lit. Rel. No. 24552 (Aug. 6, 2019).

False expenses: SEC v. Hug, Civil Action No. 1:19-cv-16290 (D. N. J. Filed August 2, 2019). Defendants Gerard Hug and Kurt Steams are, respectively, the former CEO and CFO of SITO Mobile, Ltd. The firm provides mobile data advertising platforms that allow clients to push those advertisements and coupons to consumers. Its shares are traded on the NASDAQ Capital Market. The employment contract each executive executed with SITO specified that they were entitled to reimbursement for documented, reasonable business expenses incurred in the performance of their duties. Mr. Hug executed his agreement in 2011 while Mr. Steams executed his contract two years later. Despite the contractual provisions, Messrs. Hug and Steams abused the process, repeatedly presenting for reimbursement personal expenses as proper business items. Falsified firm records were used to conceal the wrongful conduct. For example, over a two-year period, beginning in 2014, Mr. Hug improperly charged over $100,000 in personal expenses to the company charge card. Mr. Streams engaged in similar, wrongful conduct, over a three-year period, beginning in 2014. For example, during that period he charged over $200,000 in personal expenses to a corporate account. Each executive regularly falsified the codes for their expenses on spreadsheets prepared by the accounting department. The actions of the two executives resulted in a series of false filings with the Commission. Those included the proxy statement and annual report as well as the SOX certifications. The complaint alleges violations of Securities Act Sections 17(a)(1) and (3), and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and 14(a). The action is pending. A separate administrative proceeding against the firm was resolved with the company consenting to the entry of a cease and desist order based on the reporting, internal controls, books and records and proxy statement provisions of the federal securities laws A penalty was not imposed based on the significant remediation and cooperation of the firm. In the Matter of SITO Mobile, Ltd., Adm. Proc. File No. 3-19311 (August 5, 2019). See Lit. Rel. No. 24551 (Aug. 5, 2019).

Australia

Whistleblowers: The Australian Securities and Investment Commission is calling for public comment on proposed guidance regarding the new obligation of companies to implement a whistleblower policy. The new policy requires the implementation of such a program by January 1, 2020. A proposed regulatory guide explains how companies can establish, implement and maintain such a policy. The call for comment was published August 7, 2019 (here).

Monetary Authority of Singapore

Cyber security: The MAS issued new rules to strengthen the cyber resilience of the financial industry on August 6, 2019 (here). The regulator issued a “set of legally binding requirements to raise the cyber security standards and strengthen the cyber resilience of the financial sector.”

U.K.

Cooperation: The U.K.’s Serious Fraud Office issued a new cooperation policy for resolving criminal actions and those involving a deferred prosecution agreement. The new guidance makes it clear that cooperation must go above and beyond what the law requires, that the notion of cooperation is inconsistent with protecting certain individuals and that it does not guarantee a certain outcome. It was published on August 6, 2019 (here).