by T. GormanPosted on Posted in SECActions

Insider trading is a key enforcement priority as well as a controversial topic. The U.S. Attorney’s Office in Manhattan and the SEC have brought a series of highly successful and high profile insider trading cases. As those cases unfolded controversy swirled over the elements of insider trading and illegal tipping in cases such as the Second Circuit’s Newman decision and its counter part in the Ninth Circuit, all culminating with the Supreme Court’s decision in Salman earlier this term. Those debates focused on the court crafted elements of the offense and just how far judicial decisions should go in developing the elements of insider trading.

In contrast, in what are called “suspicious trading cases” the SEC typically moves quickly, even without facts or proof of key elements of the offense often citing a bevy of trading data and suggestive facts to secure a freeze order over what is believed to be illicit trading profits – the facts and proof of key elements can be developed later in discovery. This is precisely the approach used by the SEC in its latest suspicious trading case. SEC v. Yin, Civil Action No. 17 CV 972 (S.D.N.Y. Filed Feb 10, 2017).

In Yin the SEC cited a web of overlapping evidence including the timing of the trades, apparent coordinated trading among five accounts and the outsized nature of the trades and profits to seek and obtain a temporary freeze order over $29 million in alleged illegal trading profits. At the center of the case is the acquisition of DreamWorks Animation SKG, Inc. by Comcast Corporation, announced on April 28, 2016, but actually leaked to the market two days earlier on April 26.

Defendant Shaohua (Michael) Yin is a citizen of China who maintains a residence in Beijing and also in Palo Alto, California. He is a partner in Summitview Capital Management Ltd, based in Hong Kong. He is also the partial owner of Beijing Yuanshan Jingxing Investment Consultancy LLC which provides investment consultancy services to Summitview. Five individuals are named as relief defendants. Those include Mr. Yin’s mother, his father and three other individuals. The trading on which this action is based was conducted through the accounts of the five relief defendants.

PAG Asia Capital, an Asia-focused private equity fund operating primarily from Hong Kong and Shanghai began discussions with the Zhonghong Group in December 2015 about a possible deal involving DreamWorks. Two months later the fund approached DreamWorks concerning a possible deal. A confidentiality agreement was executed. Discussions ensued as did due diligence. By April 4, 2016 the board of DreamsWorks met to consider a deal in which PAG would acquire the company at a price of $35 per share, a 40% premium to market. A few days later a draft merger agreement for a proposed deal with PAG was prepared by outside counsel for DreamWorks.

As the PAG proposal unfolded the CEO and chairman of the board of Comcast contacted the CEO of DreamWorks and expressed an interest in acquiring the company. By mid-April Comcast sent DreamWorks a confidential proposal to acquire the company at $35 per share. The offer was increased to $41 per share in an April 27th offer. That offer was approved by the DreamWorks board the next day and announced after the close of the market. The proposed deal had leaked to the market two days earlier.

Beginning on April 4, 2016, the date the DreamWorks board met to consider the PAG offer, and continuing until April 25, 2016, the date the Comcast deal was leaked to the market, purchases of DreamWorks shares were made through the five relief defendant accounts on each trading day. Each of the relief defendants traded in the shares of DreamWorks through an account at Interactive Brokers. None of the accounts had traded in the shares of the company prior to the trades involved here. Typically the acquisitions were on margin. Each relief defendant had a bank account at HSBC as did Mr. Yin, whose brokerage accounts were at Fidelity. During the period each of the accounts received a wire transfer from an HSBC account, two of which had the same last four digits as the account of Defendant. Trading in the five accounts was accessed using many of the same IP addresses. The Interactive Brokers’ log-in data also connects the trading in the accounts to the Defendant, according to the complaint. Overall, the trading in the five accounts during the period represents about 16.9% of the overall trading volume. That trading is not explained by public events. No news event had an appreciable impact on the share price during the period of the trading.

The five accounts have also traded profitably in advance of public events for three China-based public companies: 58.com Inc., Ctrip.com and Giant Interactive Group Inc. Returns from these trades netted over $20 million for the accounts. Collectively the five accounts traded in over 200 different stocks from the time of their opening through January 2017. Yet the trading in DreamWorks and the three other stocks accounts for 97% of the trades in the accounts.

On February 3, 2017 the FBI executed a search warrant on Defendant Yin at the San Jose Internal Airport as he was boarding a flight to China. Over the next two days there was a flurry of activity in the five accounts, a rash of serial withdrawal requests, stock sales and communications to the brokerage firm. Overall there were attempts to withdraw over $22 million from the five nominee accounts. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23747 (February 10, 2017).

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by T. GormanPosted on Posted in SECActions

Three of the six actions filed this week by the Commission were against registered investment advisers. One involved the misappropriation of funds, another centered on the failure to disclose a related party transaction and a third was based on the use of misleading marketing materials. The agency also brought an action against a transfer agent for the sale of unregistered securities, one against a broker dealer for repeated net capital violations and a case against an issuer with inadequate internal controls where revenue recognition was improperly accelerated.

SEC

Compliance: A Risk Alert regarding its National Exam Program was issued by the SEC’s Office of Compliance Inspections and Examinations or OCIE. Drawing from its prior exam experience, OCIE identified five key areas of risk for investment advisers. Each point is highlighted by examples which should facilitate exam preparation and compliance for investment advisers. The areas identified are the compliance rule, regulatory filings, the custody rule, the requirement that there be a Code of Ethics and the books and records requirements (here).

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 1 civil injunctive case and 5 administrative proceedings, excluding 12j and tag-along proceedings.

Net capital: In the Matter of JayPee International, Inc., Adm. Proc. File No. 3-17838 (Feb. 9, 2017) names as Respondents the firm, a registered broker-dealer which largely engages in proprietary trading, and Sorabh Arora, its President and COO. Over a two year period beginning March 2012 the firm had multiple violations of the net capital rule which were not reported to the Commission in a timely manner and inaccurate FOCUS reports. The violations resulted from, among other things, losses in the commodity markets, failing to properly handle capital transfers from the parent company and not taking the proper haircuts on certain short put options. The Order alleges violations of Exchange Act Sections 15(c)(3) and 17(a). As part of the resolution of the case the firm agreed to implement certain undertakings which include the appointment of an independent consultant. To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order as well as to a censure. The firm will pay a penalty of $25,000 while Respondent Arora will pay $10,000.

Misleading marketing materials: In the Matter of Jeffrey Slocum & Associates, Adm. Proc. File No. 3-17833 (Feb. 8, 2017). Jeffrey Slocum & Associates was a registered investment adviser that provided consulting services to institutional investors. Its president and majority shareholder is Respondent Jeffrey Slocum. The Order centers on two key points. First, over a period of about three years, beginning in June 2011, the firm disseminated marketing materials to prospective clients that represented its employees did not accept gifts from business associates despite a provision in the Code of Ethics which permitted them under certain circumstances. The conflict was highlighted by the fact that certain employees accepted event tickets in violation of the Code resulting in no action by the firm. Second, the firm disseminated misleading advertising materials, in part because its compliance procedures were inadequate as were the firm’s books and records. The Order alleges violations of Advisers Act Sections 204(a), 206(2) and 206(4). To resolve the proceeding the adviser consented to the entry of a cease and desist order based on each of the Sections cited in the order and a censure. The firm will also pay a penalty of $300,000. Mr. Scolum consented to the entry of a cease and desist order based on Sections 206(2) and 206(4). In addition, he will pay a penalty of $100,000.

Related party transactions: In the Matter of SLRA Inc., Adm. Proc. File No. 3-17826 (Feb. 7, 2017) is a proceeding which names as Respondents the investment advisor and its founder and principle. Over a two year period beginning in 2009 Mr. Landress sought additional compensation from the limited partners of two funds he created and which were managed by SLRA. The funds were sought following a decline in real estate values — the funds invested in securities in the form of real estate private equity secondary transactions – following the market crisis. The partners refused. On January 7, 2014 Mr. Landis, as the controlling member of SLRA and the general partner, directed the transfer of £16.25 million from the Funds’ accounts to SLRA. The partners were informed that the funds were for fees to an affiliate for services performed for the Funds from 2006 through 2013. The money was transferred to a personal account. Mr. Landress claimed the fees were allowed by the Funds’ operating documents and an oral agreement made in 2006 by him on behalf of the Funds. There was no disclosure of any oral agreement or this related party transaction and the conflicts. The Order alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. SLRA was censured. Mr. Landress was barred from the securities business and directed to pay a penalty of $1.25 million.

Unregistered securities: In the Matter of Olde Manmouth Stock Transfer Co., Inc., Adm. Proc. File No. 3-17827 (Feb. 7, 2017) is a proceeding which names as Respondents the registered transfer agent and Matthew J. Troster, its President. Between July 2007 and May 2009 the transfer agent processed more than 200 transfers of Spongtech Delivery Systems, Inc. shares after removing the restrict legends based on opinion letters that were facially deficient. Respondents engaged in similar misconduct in 2013 with respect to shares of Analytica Bio-Energy Corp. The Order alleges violations of Securities Act Section 5. To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order and to the entry of a censure. The firm will pay disgorgement of $22,140, prejudgment interest and a penalty of $100,000. Mr. Troster will pay a penalty of $15,000.

Internal controls: In the Matter of Ixia, Adm. Proc. File No. 3858 (Feb. 3, 2017) names as Respondents Ixia, a maker and seller of software solutions, and Victor Alston, previously the firm’s vice president of applications. Beginning in October 2012 Mr. Alston sought to accelerate revenue recognition. He did this by splitting purchase orders. The firm bundled the sale of software, services and other items on purchase orders. Under GAAP revenue could not be recognized for the sale of the software and professional services because they were not valued. By splitting the purchase orders Mr. Alston sought to recognize the revenue prematurely and establish a value for the services. After Mr. Alston left the firm an investigation by the audit committee uncovered the misconduct. The firm self-reported to the Commission. The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The firm undertook remedial efforts and cooperated with the staff’s investigation. The firm also agreed to certain undertakings. To resolve the case the firm consented to the entry of a cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The firm will also pay a penalty of $750,000. Mr. Alston consented to the entry of a cease and desist order based on each Section cited in the Order. He will pay a penalty of $100,000.

Misappropriation: SEC v. Connell, Civil Action No. 1:17-cv-00831 (S.D.N.Y. Filed Feb. 3, 2017) is an action against Barry Connell who was previously employed at a Commission registered investment adviser and broker-dealer. Over a period of about two years beginning in December 2015, Mr. Connell misappropriated about $5 million from advisory clients of the firm. He carried out his scheme by making numerous wire transfers and writing checks from the accounts to third parties for his benefit. The complaint alleges violations of Advisers Act Sections 206(1) and 206(2). The case is pending. A parallel criminal action was filed by the Manhattan U.S. Attorney’s Office.

FINRA

Remarks: Susan F. Axelrod, EVP, Regulatory Operations, FINRA, delivered remarks at the SIFMA Anti-Money Laundering and Financial Crimes Conference, New York City (Feb. 9, 2017). Her remarks focused on the identification of issues regarding AML compliance. Those include incorrectly settling the parameters on compliance programs, the inability to properly police suspicious activity, inadequate due diligence and programs which were not specifically tailored to the business (here).

Hong Kong

Deficient order execution: The Securities and Futures Commission reprimanded and fined GMO-Z.com Forex HK Limited $1.6 million for deficiencies regarding its order execution and slippage handling procedures as well as failures in its electronic trading system. The deficiencies included inadequate procedures which permitted orders to be executed at the last tradable price rather than the next available price, failing to inform clients that under its policy client order execution would not be confirmed until the firm had hedged the position and the failure to disclose the fact that the system for the execution of client orders for leveraged foreign exchange contracts did not function properly which could impact execution.

Disclosure: The Market Misconduct Tribunal found that Mayer Holdings Limited and nine of its current and former senior officers failed to disclose inside information about the firm identified by its auditors as soon as practicable as required. The auditors informed the firm and its executives about the suspicious nature in which a subsidiary was sold, that the firm did not control projects in Vietnam it purchased and which appeared to be overvalued, and that two other subsidiaries had made substantial payments without security. The auditors resigned but did not disclose the issues. The MMT will hold a hearing in march to determine the orders to be imposed.

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