by T. GormanPosted on Posted in SECActions

Earlier this spring the Commission resolved insider trading cases where one spouse misappropriated inside information from another and an in-house corporate counsel breached an obligation to his firm by using material non-public corporate information to trade. In both cases the person trading secured ill-gotten gains from the wrongful act – at least for a time. In contrast, in the Commission’s most recent insider trading case the person who breached a duty of confidence by using inside information or by passing it along did not directly profit from it – others did. SEC v. Fettner, Civil Action No. 9:19-cv-80613 (S.D. Fla. Filed May 7, 2019).

Defendant Brian Fettner is a long-time friend of the General Counsel of Cintas Corporation, a Cincinnati based provider of products and services such as uniforms, floor care products, restroom supplies and similar items. The two men had been friends since high school and frequently stayed at one another’s homes. When Mr. Fettner visited Cincinnati to see his parents he stayed at the home of General Counsel.

On June 14, 2016 Mr. Fettner came to Cincinnati to play in a charity golf tournament with General Counsel. As was their custom he stated at the home of General Counsel. At the time Cintas was in merger discussions with G&K Services, Inc., a firm engaged in a similar line of business. The discussions had been underway since May 2016 when they had been rekindled following a break in January of the same year.

By mid-June the discussions had progressed. G&K provided General Counsel with a draft nondisclosure and standstill agreement for review. General Counsel took the papers home in a folder that included other documents pertinent to the discussions. He put the folder in the office/den in his home.

On June 15, 2016 Mr. Fettner went into the office/den to put on his golf shoes. While he was in the room Mr. Fettner saw the documents regarding the then under discussion transaction. He did not mention the materials to his friend. Rather, the two men left the house to play golf.

Later that day Mr. Fettner purchased shares of G&K common stock. The transaction was done in the account of his ex-wife. While he did not have trading authority for the account, in fact he was the only person that actually used it.

Following the golf tournament Mr. Fettner returned home to Henderson Nevada. While there he persuaded his girlfriend to purchase shares as well as his father. He also purchased shares in the account of a former girlfriend and again in the account of his ex-wife. Overall Mr. Fettner, or those he persuaded to buy shares, made five purchases of G&K stock.

When the acquisition was announced on August 16, 2016 the share price rose about 17.7%. Collectively the accounts of ex-wife, girlfriend, former girlfriend and father had profits of at least $250,000. Mr. Fettner did not obtain any of the trading profits. The complaint alleges violations of Exchange Act Section 10(b).

To resolve the case Mr. Fettner consented to the entry of a permanent injunction based on the section cited in the complaint. He also agreed to pay a penalty in the amount of $252,000. The ex-wife and former girlfriend were named as relief defendants.

SEC 85th Anniversary Gala: On June 3, 2019, the SEC Historical Society will host a gala celebration to commemorate the 85th Anniversary of the founding of the U.S. Securities and Exchange Commission and its 20th Anniversary. The event will be held at the Building Museum, Washington, D.C. Following a brief program featuring SEC Chairman Jay Clayton, there will be cocktails and dinner. For further information regarding tables and tickets please contact the Society on or before May 15, 2019 here (full disclosure Mr. Gorman is the President of the Society).

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by T. GormanPosted on Posted in SECActions

While the SEC continues to bring financial fraud actions periodically, they are no longer the staple of the Enforcement Division. While efforts have been made to reinvigorate the process of fretting out these types of actions, they have typically produced less than stellar results. Nevertheless, the agency does at times file a financial fraud case such as In the Matter of GT Advanced Technologies Inc., Adm. Proc. File No. 3-19156 (May 3, 2019) which centers on the efforts of a manufacturer to conceal is failures under a contact with Apple Inc.

GT Advanced is a manufacturer and supplier of a product known sapphire glass, used by Apple as a cover for its next generation iPhone. In October 2013 the company secured a coveted contract with Apple to supply the product. The agreement had two key components. One component set performance standards under which GT would supply the important iPhone component over a period of time. This part of the agreement contained certain manufacturing specifications that Apple required and specific milestones to be met by the manufacturer. The other component stipulated that Apple would make quarterly advances to the company to facilitate the process. The tech firm had the right to cancel the agreement if GT failed to meet the contract requirements. To accommodate the scale of sapphire manufacturing required by the agreement, Apple leased a facility in Arizona for GT.

Virtually from the beginning, GT had difficulty complying with the contract specifications as CEO Thomas Gutierrez and other officials knew. In November 2013 Apple made the first milestone payment to GT just fifteen days after contract execution. Fortunately for GT there were no associated manufacturing milestones tied to the payment. Since the Arizona manufacturing facility had not been completed at the time, the two firms reset future deadlines. GT never disclose this fact in its filings with the Commission.

In April 2014 Apple made another payment. Yet the next month an Apple supply executive warned Mr. Gutierrez in a text message that the low quantity of sapphire produced was a “major problem.” By June the executive emailed the CEO noting that he had “extremely limited confidence” that GT could meet the 2014 production requirements. In fact, the company continually revised its sapphire production projections downward. Apple advised the firm in July 2014 that it would not use sapphire glass for its iPhone 6 launch.

Despite the production problems and the revised schedule, in July Mr. Gutierrez requested that Apple make the next installment payment. The tech company rejected the claim. In addition, failing to meet the fourth milestone gave Apple the right to accelerate repayment of the advances. If that right was exercised it could have created going concern issues for GT. These facts were omitted by GT from its quarterly filing with the Commission, made in August 2014.

Although GT did not seek a waiver of its obligations, the firm did adopt a strategy regarding the sums owed Apple and the missed manufacturing deadlines amid concerns by its auditors. The company claimed falsely that Apple was in breach of the contract. Notice was not provided to Apple, although Mr. Gutierrez did request in an email that the company confirm that the parties were postponing the setting of revised criteria for the next milestone. Apple confirmed this fact.

In early August Mr. Gutierrez held an analyst call. During the call he stated that Apple was expected to make the fourth installment payment in October 2014. Several days later he made a similar statement in another all. Later GT sent Apple draft disclosures which contained essentially the same representations. The draft filings did not reiterate GT’s claim that Apple was in breach. Apple told the firm that the disclosures were not correct.

GT’s financial disclosures for the second quarter regarding sources of cash, liquidity, backlog and EPS projections included unsupported sales projections for sapphire glass furnaces. The projections assumed sales despite the fact that Apple had refused. The customers were also unable to authorize the sales.

Eight weeks after the second quarter filing containing these statements, GT filed for Chapter 11 bankruptcy. The Order alleges violations Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B).

To resolve the proceedings GT consented to the entry of a cease and desist order based on the sections cited in the Order. See also In the Matter of Thomas Gutierrez, Adm. Proc. File No. 85768 (May 3, 2019)(Proceeding against GT CEO based on same factual allegations; resolved with a similar cease and desist order excluding Section 13(b)(2)(B), and the payment of disgorgement of $15,510.00, prejudgment interest of $2,993.91 and a penalty of $125,000).

SEC 85th Anniversary Gala: On June 3, 2019, the SEC Historical Society will host a gala celebration to commemorate the 85th Anniversary of the founding of the U.S. Securities and Exchange Commission and its 20th Anniversary. The event will be held at the Building Museum, Washington, D.C. Following a brief program featuring SEC Chairman Jay Clayton, there will be cocktails and dinner. For further information regarding tables, tickets and advertisements in the program please contact the Society here (full disclosure Mr. Gorman is the President of the Society).

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