by T. GormanPosted on Posted in SECActions

Cases involving investment advisers are rapidly becoming a key focus for SEC Enforcement. Offering fraud actions are another central focus. In both sets of cases retail investors are typically victimized, losing much of their hard earned savings and pension dollars. In the Matter of Matthew R. Rossi, Adm. Proc. File No. 3-19145 (April 17, 2019) is an action which in many respects combines the elements of each of these types of actions – a dishonest adviser and the hype of an offering fraud.

Respondents are Mr. Rossi who holds a Series 65 license and his firm, SJL Capital, LLC, a state registered investment adviser that managed the MarketDNA Hedge Fund LP and several separately managed accounts or SMAs.

Over a period of months, beginning in May 2016 Respondents defrauded several advisory clients and at least one who invested in the Fund. The Fund supposedly invested in a diversified portfolio of largely publicly traded equity securities It also claimed to have a highly successful proprietary algorithm created by Mr. Rossi known as MarketDNA. The algorithm, developed over a period of years, could take advantage of certain market inefficiencies. Marketing materials touted the success of the approach and its favorable returns while pointing to a feature called a safety value that supposedly protected against loss. The claims were false.

Initial trading returns, employing a high-risk option strategy were, nevertheless, successful. During the initial month of trading profits were made. Those returns vanished during the following months in repeated losses, often concealed from view with false statements furnished to clients.

By March 2017 the SMA clients had loses of over $1.7 million. They revoked the discretionary authority that permitted Respondents to trade. The Fund lost over $300,000. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4).

To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. The firm was censured. Mr. Rossi is bared from the securities business. Issues regarding disgorgement, prejudgment interest and penalties will be considered at a hearing to be held in the future.

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by T. GormanPosted on Posted in SECActions

Last week the Commission brought an insider trading action against an in-house counsel at SeaWorld. Another insider trading action filed last week involved the Amazon – Whole Foods merger. There the husband misappropriated inside information on the pending deal from his wife who had been entrusted with inside information by a close family member. Now the agency has settled with a corporate executive who breached his obligations to his firm using the corporate information with which he had been entrusted to trade company securities for his personal benefit prior to a disappointing earnings announcement. SEC v. Wilcox, Civil Action No. 2:19-cv-02437 (D. Ariz. Filed April 16 2019).

Defendant Quentin Louis Wilcox began with Avnet, Inc., a distributor of electronic components, in January 2006 as a Senior Financial Analyst. He was schooled by the firm in its code of conduct which prohibited insider trading.

In May 2015 Mr. Wilcox became the financial manager for budgeting and forecasting at the company. Through that position he had access to Avnet’s financial information which was available on the company SAP Business Explorer computer program.

Beginning in March, and continuing through April, Mr. Wilcox received a number of emails in his capacity as the financial manager regarding the potential financial results for the third quarter of 2017 and the fourth quarter financial guidance. Mr. Wilcox understood toward the end of April that the financial results would be disappointing. One email, for example, depicted revenue for the period while another projected guidance. The revenue numbers were down; the guidance was down.

On April 25, 2017, Mr. Wilcox sold short 2,530 shares of firm stock. The price was $44.99 per share. The next day he placed an order to cover the short position at $35 per share. That same day he also purchased 100 May 19, 2017 put options in the stock. The options had a strike price of $45 per share. The cost was $1.10 per contract. Defendant also placed a sell order for all of the options at a minimum of $5 per contract the same day.

Avent released its earnings announcement for the third quarter along with fourth quarter guidance on April 27, 2017. Both numbers were lower than expected. The share price declined 8% over the trading day.

A few hours after the earnings announcement Mr. Wilcox canceled the “cover” order for the short sale but immediately placed a new cover order at $39 per share. The transaction resulted in a profit of $15,154.70. That same day Defendant’s option order was executed, netting him a total trading profit of $40,000. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a).

To resolve the proceedings Mr. Wilcox consented to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint. In addition, he agreed to pay disgorgement of $55,154 plus prejudgment interest of $3,744 and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 24453 (April 16, 2019).

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