by T. GormanPosted on Posted in SECActions

The Commission has brought an increasing number of enforcement actions focused on either a failure to comply with firm procedures or for inadequate procedures. In many instances the actions arise from inspections by OCIE. The SEC’s latest case in this area focus on both aspects of the compliance question – first there were no procedures; then, when installed, they were inadequate. In the Matter of Sidoti & Company, LLC, Adm. Proc. File No. 3-17843 (February 13, 2017).

Sidoti was established in 1999 as an independent research firm, focused on small and microcap public companies. Over the years the firm expanded its operations. For example, in 2004 Sidoti expanded its business by offering brokerage and investment banking services. The sales and trading operations distributed the firm’s research product and proprietary investment recommendations. Its services included block trades, Rule 144 transactions and facilitating Rule 10b-5-1 plans.

In 2014 the firm again sought to expand. Sidoti decided to raise capital through an IPO. The firm also established a hedge Fund, an Adviser and a holding company structure chaired by its founder and CEO. Trading in the Fund began in early November 2014. The Adviser continued its services until October 2015. Ultimately the firm decided not to conduct the offering.

For an eight month period beginning on November 3, 2014 Sidoti did not have any written policies and procedures regarding the misuse of material non-public information in connection with the Adviser and trading in the Fund. Dur ing the same period the CEO controlled Sidoti’s investment banking and research departments and maintained trading authority in the Fund. The firm’s written policies and procedures precluded the misuse of material non-public information by the investment banking and research departments. Those policies did not restrict the CEO from misusing material non-public information obtained from those departments when making decisions for the Fund. For example, although Sidoti maintained a Restricted List of securities that the firm and its employees could not trade, between November 3, 12014 and May 5, 2015 the Fund traded in shares on that list 126 times.

Subsequently, the firm amended is written policies and procedures to prevent the misuse of material non-public information in response to concerns raised by the staff. Although the amended procedures created some information barriers to address the roles of the CEO, they lacked an enforcement mechanism. The Order alleges violations of Exchange Act Section 15(g).

In considering the firm’s offer of settlement, the Commission considered the fact that the firm cooperated and took remedial steps which included discontinuing its advisory operations and the retention of compliance consultants.

To resolve the proceeding Respondent consented to the entry of a cease and desist order, a censure and agreed to pay a penalty of $100,000.

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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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