by T. GormanPosted on Posted in SECActions

Insider trading has long been a staple of the Commission’s Enforcement program. Cooperation credit, while frequently touted and often discussed is not, at least in the form of a deferred prosecution agreement. Rather, the awarding of cooperation credit is typically reserved to the discretion of the agency and most often seen in the form of a reduced or no penalty for a settling defendant or respondent. In resolving its most recent insider trading case, however, the Commission took the unusual step of settling with the tipper and entering into a deferred prosecution agreement with the tippee who significantly facilitated the resolution of the investigation and case. SEC v. Lozuk, Civil Action No. 18 cv 1765 (S.D. Ca. Filed July 31, 2018).

The action

The action centers around the acquisition of Sequenom, Inc., a San Diego life sciences firm, by Laboratory Corporation of America or LabCorp, in a transaction announced on July 27, 2016. Defendant Robert Lozuk was the Senior Vice President of Commercial Operations at Sequenom.

The transaction traces to June 8, 2016 when Sequenom’s board of directors instructed an investment bank to contact LabCorp and other companies to assess their interest in acquiring the firm. Sequenom subsequently conducted due diligence and entered into discussions with LabCorp. Mr. Lozuk became aware of the discussions by at least June 8, 2016. On July 20, 2016 representatives of the firm agreed on a deal price of $2.40 per share – the stock traded at under $1.00 per share.

The day after the deal price was set Mr. Lozuk attended a concert with long time friend Individual A. He had signed a confidentiality agreement about one year earlier. Nevertheless, at the concert he told his friend about the proposed deal and too purchase 10,000 shares of the firm’s stock.

When the deal announcement was made six days later, the share price increased 176% to $2.35 per share. Trading volume increased 11,214.5% in one trading day. Individual A sold his shares, reaping profits of $26,643.80.

In March 2017 the staff issued an administrative subpoena to Individual A. He immediately contacted the staff and fully disclosed the facts and circumstances regarding his stock transaction. At the time the staff was not aware of Mr. Lozuk’s involvement. Individual A entered into a deferred prosecution agreement on June 18, 2018, agreeing to disgorge his trading profits and fully cooperate with the staff’s investigation.

The complaint alleges violations of Exchange Act sections 10(b) and 14(e). To resolve the action Mr. Lozuk consented to the entry of a permanent injunction based on the sections cited in the complaint. In addition, he agreed to the entry of a five year officer and director bar and will pay a penalty equal to the amount of Individual A’s trading profits.

Comment

When the Enforcement Division adopted non-prosecution agreements and deferred prosecution agreements several years ago the goal was straight forward – to speed enforcement investigations, conserve resources and encourage cooperation. Despite these laudable goals the agreements are not frequently used.

The facts here, however, seem tailor made for the use of such an arrangement. Here the Division was unaware of Mr. Lozuk’s involvement, according to the facts set-forth in the agreement. No doubt once Individual A stepped forward, the investigation move forward swiftly. Perhaps now, in the age of Kokesh and the statute of limitations their use will increase, encouraging others to step forward while speeding Enforcement investigations — a win win for everyone.

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by T. GormanPosted on Posted in SECActions

While offering fraud actions have long been a Commission staple, with the advent of the retail investor focus there seems to be an increase in the number of these cases being brought. In the latest variation of these cases the defendant typically promised to invest funds in ventures such as a Tribal Lending Entity or a consumer lending operation. Promised returns ranged up to 20%. The only real returns were for the defendant who misappropriated much of the investor money. SEC v. Harbour, Civil Action No. 2:18-cv-002401 (D. Az. Filed July 31, 2018).

Defendant David Harbour is a former FINRA member but has not been associated with a broker-dealer since January 2008. He has long been involved in the payday loan business. In 2014 Mr. Harbour began developing a Tribal Lending Entity. Under an agreement through one of his controlled entities, a line of credit for $10 million was extended to the Tribal Lending Entity at an annual interest rate of 16%. The borrower planned to enter into the online consumer lending business. Over the next two years Mr. Harbour entered into other business ventures.

To raise capital for his various business entities, Mr. Harbour began soliciting investments using four controlled entities as he multiplied his business activities. Investments were sought from a series of investors based misrepresentations. For example, one investor was convinced to invest $500,000 with Mr. Harbour and his entities based on the representation that the funds would be used for an installment lending operation that would be run by an American Indian tribal entity. In return for his investment Mr. Harbour’s entity issued a promissory note to the investor with a 12% annual interest rate.

Another investor was convinced to invest $1 million with Mr. Harbour and another of his controlled entities. In this instance the investor was told that the funds would be used for consumer lending and a project related to healthcare. The investor was promised an annual return of 20%. A third investor was convinced to invest $500,000 for the Tribal Lending Entity based on the promise that he would recover lost funds from another Harbour connected investment. In return for his funds the investor received a promissory note tied to a lending agreement. The note carried a 15% annual return rate.

Overall Mr. Harbour raised over $2.4 million from a number of investors. He misappropriated over $1.5 million for his personal use. The complaint alleges violations of Exchange Act section 10(b) and Securities Act section 17(a)(2). To resolve the action Mr. Harbour consented to the entry of a permanent injunction. He also agreed to pay disgorgement of $1,535,000, prejudgment interest of $97,072 and a penalty of $1,535,000. See Lit. Rel. No. 24220 (July 31, 2018).

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