by T. GormanPosted on Posted in SECActions

The SEC filed its third “suspicious trading” case this year as last week drew to a close. SEC v. One or More Unknown Traders, Civil Action No. 17 CV 2659 (S.D.N.Y. Filed April 13, 2017). As with its earlier suspicious trading cases, the identity of the traders is not known. Whether the traders actually had inside information is not known. Also not known is how the traders would have acquired inside information. What is known is that the traders (it is assumed there is more than one but nobody knows) took large, risky option positions prior to the announcement of a corporate transaction.

Earlier this year the SEC filed a suspicious trading case centered on the acquisition of Mobileye, N.V. by Intel. SEC v. Darvasi, Civil Action No. 17-cv-2088 (S.D.N.Y. Filed March 23, 2017). The month before the Commission filed a similar action centered on the acquisition of Dreamworks by Comcast. SEC v. Yin, Civil Action No. 17 cv 972 (February 10, 2017). The point of these cases is to obtain a freeze over the accounts while the facts are sorted out as was done here. If effective insider trading enforcement, as has been the case in recent years, is supposed to dampen enthusiasm for such transactions, the spur of outsized trading profits seems to have kindled heated interest.

The SEC’s most recent suspicious trading action centers on the acquisition of General Communication, Inc. by Liberty Interactive Corporation, announced on April 4, 2017. General Communications provides residential and business telecommunications services in Alaska. Liberty competes in the video and digital commerce industries.

The trading discussed in the complaint took place through two accounts. One account was in the name of Cedrus Invest Bank SAL, Beirut, Lebanon. Trades were placed in the bank’s master account at Interactive Brokers, Inc. in the U.S. The master account had subaccounts. The other account was in the name of Nomura Securities plc, a UK based subsidiary of Nomura Europe Holdings plc. Nomura UK has a trading account at Nomura Securities International, Inc., in New York City.

Liberty approached General Communication on December 2, 2016 about a deal in which the firm would be acquired. Several days later a non-disclosure agreement was executed. By January 21, 2017 a written proposed for a business combination was delivered to General Communication.

Between the time of the initial proposal and the April 4 announcement date the deal progressed toward conclusion:

  • On February 9, 2017 the General Communication board considered the proposal;
  • A special committee was established by General Communication on March 3, 2017 with the charge to consider and negotiate a deal;
  • The special committee retained Lazard Freres & Co. as financial advisors on March 11, 2017;
  • Moody’s and S&P were informed about aspects of the proposed deal on March 31, 2017; and
  • Lazard made a fairness presentation to the General Communication special committee on April 3, 2017.

All of the trading through the Cedrus and Nomura accounts was in options. A table of the trades shows five purchases were through the Nomura account and three through the Cedrus account shortly before the deal announcement:

  • Trade one: Cedrus on March 20;
  • Trades two and three: Both through Nomura on March 22;
  • Trade four: Cedrus on March 23;
  • Trade five: Cedrus on March 29;
  • Trade six: Nomura on March 30;
  • Trades seven and eight: Both through Nomura on March 31.

The Nomura account purchased a total of 753 options at a cost of $21,434 while the Cedrus account acquired 540 option contracts at a cost of $26,675. All of the options purchased were out of the money. The option purchases represented a significant amount of the volume in those options. Neither account was hedged. Between October 1, 2016 and March 19, 2017, neither account purchased General Communication options.

When the deal was announced the share price rose 62.4% compared to the prior day’s close. The initial investment in the two accounts, which totaled $48,109, was worth over $1 million. The complaint alleges violations of Exchange Act Section 10(b). The case is pending.

by T. GormanPosted on Posted in SECActions

In a holiday shortened week the Commission began preparation for argument before the Supreme Court in an action which could have a significant impact on its enforcement program. The question for resolution is whether the statute of limitations in Section 2462 of 28 U.S.C. applies to claims for “disgorgement.” Kokesh v. SEC, No. 16-529. An adverse ruling could limit the Commission’s ability to seek one of its most frequently used remedies. Argument is scheduled for next Tuesday, April 18, 2017 at 10:00 a.m.

The regulator brought thirteen cases this week, charging 27 persons with touting and/or other related violations. The cases were filed as a group on Tuesday, emphasizing the Commission’s focus on the question. While 17 of those charged agreed to settle, 10 others are litigating the cases.

SEC

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 2 civil injunctive cases and 11 administrative proceedings, excluding 12j and tag-along proceedings.

Touting: In the Matter of Manish Singh and Lavos, LLC, Adm. Proc. File No. 3-17920 (April 10, 2017). This is one of thirteen similar actions brought by the Commission centered on touting. Twenty-seven persons were charged. Generally, the SEC claimed that those charged paid others to write articles promoting the issuer in articles which presented the material as unbiased market reports without disclosing that the author had been paid in violation of Securities Act Section 17(b). Seventeen of those charged agreed to settlements which include disgorgement or penalties ranging from $2,200 to nearly $3 million. Ten others charged are litigating with the Commission. In this action, which typifies the others, Mr. Singh was the President and CEO of ImmunoCellular Therapeutics, Ltd., for a time and then the CEO of Lion Biotechnologies, Inc. He also controlled Respondent Lavos, LLC for a period. That firm provided promotional services to issuers, including publishing articles. The Order charged Mr. Singh with being a paid stock-tauter for twelve issuers, frequently using his firm. None of the publications involved disclosed his compensation which totaled at least $1.75 million in cash and equity. The Order alleges violations of Exchange Act Section 10(b) and Securities Act Sections 5(b)(1), 17(a) and (b). To resolve the matter Respondent Singh agreed to implement certain undertakings. In addition, each Respondent consented to the entry of a cease and desist order based the Sections cited in the Order. Mr. Singh was also barred from participating in any penny stock offering with a right to apply for reentry after five years and from serving as an officer or director of an issuer for five years. He will pay disgorgement of $1,750,000, prejudgment interest and a penalty of $1 million. See also In the Matter of Cytrx Corporation, Adm. Proc. File No. 3-17919 (April 10, 2017). (Biopharmaceutical company is alleged to have violated the prospectus requirements through, among other things, the circulation of articles it largely wrote about the firm while it was in registration; settled with a cease and desist order based on Securities Act Section 5(b)(1), undertakings and a penalty of $75,000); In the Matter of Michael A. McCarthy, The DreamTeam Group, LLC, Mission Investor Relations, LLC and Qualitystocks LLC, Adm. Proc. File No. 3-17917 (April 10, 2017)(articles touting the company written as if by independent third party but paid for by firm without disclosure in violation of Securities Act Sections 17(a)(2) and (3) and 17(b); resolved with a cease and desist order based on cited Sections, disgorgement and a penalty). See Lit. Rel. No. 23802 (April 12, 2017).

Criminal Cases

Offering fraud: U.S. v. Seitz, No. 1:16-cr-98 (E.D. Va.) is an action in which defendant Gregg Seitz pleaded guilty to one count of conspiracy to commit wire fraud. The charge was based on two schemes conducted by Mr. Seitz. In one he solicited investors to invest in real estate – a house flipping venture through which he claimed to be making substantial sums. In the other he claimed to have a lucrative contract with the Department of Homeland Security for software. Neither scheme existed; the money was either used to make Ponzi type payments or misappropriated.

Insider trading: U.S. v. Davis, No. 1:16-cr-00338 (S.D.N.Y. Verdict April 7, 2017). Defendant William “Billy” Walters, a well known Las Vegas gambler, was found guilty by a New York jury on two counts of conspiracy, four counts of securities fraud and four counts of wire fraud. Defendant Thomas Davis was a director of Dean Foods Company and a member of the audit committee. He was also a member of a group of shareholders of Darden Restaurants, Inc. trying to institute change at the company. Mr. Davis pleaded guilty and has been cooperating with the government. From 2008 through 2012 Mr. Davis repeatedly tipped his friend William Walters in advance of certain corporate events related to Dean Foods, according to court papers. Mr. Davis also tipped his friend in advance of the spin-off of a profitable Dean Foods subsidiary, The WhiteWave Foods Company. In addition, the director provided Mr. Walter, in 2013, with information he obtained on a confidential basis from a group of investors seeking to institute corporate change at Darden. As he was tipped Mr. Walters traded profitably, netting him at least $40 million in profits. In exchange for the inside information Mr. Walters aided Mr. Davis with his financial difficulties, furnishing him with almost $1 million. Sentencing for Mr. Walters is scheduled for July 14, 2017. The SEC’s parallel case is pending. SEC v. Walters, Civil Action No. 1:16-cv-03722 (S.D.N.Y. Filed May 19, 2016).

Australia

Corruption: The Court ordered that Trevor Flugge, the former chairman of AWB Limited, pay a penalty of $50,000 and be disqualified from managing corporations for a period of five years. The order is based on findings that he breached his duties as a director by failing to stop the firm from making improper payments to the Government of Iraq in connection with providing humanitarian aid to the country during the U.N. embargo. The action is tied to the Commission of Inquiry known as the Cole inquiry established in 2005 to enquire into matters relating to AWB supplying wheat to Iraq under the U.N. program permitting humanitarian aid. In his final report Commissioner Cole made certain adverse findings as to AWB and recommended that the Australian Securities and Investment Commission, among others, investigate.

Hong Kong

AML: The Securities and Futures Commission fined STAR International Futures Co. Ltd. $3 million in connection with a failure to comply with anti-money laundering regulatory requirements. Those requirements specify that the firm take all reasonable measures to ensure that proper safeguards exist to guard against the risks of money laundering and terrorist financing associated with third party fund transfers. Here between, January and July 2014, the firm failed to comply with its obligation by: not obtaining proper written instructions from clients and verifying the identity of their parties; not making sufficient enquiries regarding third party deposits and maintaining the proper records; ensuring that the approval process for third party deposits was effective; providing adequate training for its staff; and installing an appropriate and effective compliance function. In assessing the penalty the regulator considered the remedial acts of the firm and its cooperation.

Market abuse: The Market Misconduct Tribunal dismissed charges brought by the Securities and Futures Commission against five former executive directors of CITIC Limited arising out of an incident on September 12, 2008. At that time the directors were alleged to have put out false and misleading information about the firm’s financial position which caused its share price to be artificial, thereby injuring shareholders. The SFC was seeking to compensate the injured shareholders.

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