by T. GormanPosted on Posted in SECActions

Trading on inside information has long been prohibited by the federal securities laws. While the antifraud provisions, such as Exchange Act Section 10(b), do not mention insider trading, there is no doubt it is prohibited. At the same time, what precisely constitutes insider trading has evolved over the years. The courts have repeatedly added to, and refined, the definition of precisely what constitutes a violation of the fraud sections in this regard. Despite this evolution over the years, in many cases there is no question – the fundamental breach of duty that is the bedrock of the violation is clear. That is the situation in the Commission’s most recent insider trading case, SEC v. Bauch, Civil Action No. 9:24-cv-80919 (S.D. Fla. Filed July 30, 2024).

Defendant Charles Baugh is a resident of Boca Raton, Florida. The company involved here is ADT, Inc., a publicly traded firm that provides residential and small business electronic security and alarm monitoring services in the U.S.

On August 3, 2020, ADT announced that it had entered into a long-term partnership with Google LLC. The purpose of the deal was to create the next generation of smart home security services. ADT and Google began discussions that yielded the agreement in early 2020. By mid-July 2020 Google presented an agreement and proposed equity investment in ADT to its board. Negotiations continued. Eventually the agreement required a $450 million investment by Google in ADT to acquire a 6.6% ownership in ADT. The news release explained that the partnership would combine ADT’s award-winning hardware and services called Nest with Google’s machine learning technology to create a more helpful smart home experience for customers.

A Baugh Family Member had been employed at ADT as a senior employee since 2019. Defendant and Family Member shared a close familial relationship. Family Member often consulted Defendant, whom he considered a close confident.

During a July 4, 2020, family gathering, Defendant learned material, non-public information regarding the possible partnership between ADT and Google from Family Member. In view of Family Member’s senior position with ADT, the complaint alleges that Defendant realized the information shared about the potential deal was material. Defendant also recommended to another relative that ADT securities be purchased.

On July 6, 2020, when the markets opened after the holiday, Defendant began purchasing ADT call options. Five different brokerage accounts were used to build a position. About $66,000 was invested. Family Member also purchased ADT securities.

Immediately after the deal announcement, Defendant began liquidating his potion. He realized a profit of over $320,900 – almost a 500% profit. Family Member had invested $8,000 in ADT securities. The position was liquidated after the deal announcement was published. Family Member was not told that Defendant had invested. The complaint alleges violations of Exchange Act Section 10(b).

Defendant resolved the matter, consenting to the entry of a permanent injunction based on the Section cited in the complaint. He also agreed to pay disgorgement in the amount of $320,908 based on his trading profits and those of Family Member. In addition, Defendant agreed to pay a penalty of $473,660. See Lit. Rel. No. 26062 (July 30, 2024).

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by T. GormanPosted on Posted in SECActions

Offering fraud actions continue to be perhaps the most prevalent type of action initiated by the Commission. These cases are repeatedly filed based on a variety of fraudulent schemes carefully designed and crafted to lure trusting investors into putting their hard-earned cash into what often turns out to be nothing more than a greedy fraudster spinning stories of profits but not for the investors, only him. The Commission’s latest case in this area is SEC v. San Miguel, Civil Action No. 4:24-cv-002805 (S.D.Tx. Filed July 29, 2024).

Defendant Thomas San Miguel is a resident of Montgomery, Texas. During the time of this action he served as the President, CEO and sole director of SGR Energy, Inc., a private company based in Huston, Texas. The company operated until late 2021. In July 2022 a creditor initiated involuntary Chapter 7 bankruptcy proceedings for the company. In re SGR Energy, Inc., Case No. 4:22-bk-32050 (Bankr. Tex. Filed July 22, 2022). A Trustee currently oversees the company.

Beginning in November 2015, and continuing until December 2021, Defendant San Miguel raised about $21.3 million from over 300 investors. Those investors purchased interests in his firm, SGR Energy, Inc. Investors were told that the shares had a 12% annual dividend. Investors were told that the dividend was funded by escalating revenues and profits and a $19 million account receivable.

There were, in addition, other sources of revenue and funds to assure potential investors that they should put their cash into SGR shares. For example, the investor funds were to grow the company and expand its fuel-blending business. This would be done by expanding the geographical scope of its customers and acquiring strategically situated blending facilities and terminals. Defendant also touted SGR’s supposed acquisition of a large fuel terminal in Columbia. Investors were assured that commissions were not paid to sales personnel.

The claims were false as were the books. Defendant knew that the revenues were minimal. Defendant knew that there was no $19 million account receivable. And, he knew that no terminal in Columbia was acquired. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). See Lit. Rel. No. 26059 (July 29, 2024).

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