by T. GormanPosted on Posted in SECActions

The SEC filed an action against the CEO of a U.S. subsidiary of a U.K firm who implemented a financial fraud at the behest of his superiors. The firm was eventually sold to a U.S. public company at an inflated price based on the false financial statements. In the Matter of Christopher Egan, Adm. Proc. File No. 3-17678 (Nov. 15, 2016).

Respondent was the Head of Sales and CEO of Autonomy, Inc., a subsidiary of Autonomy Corporation, Plc, a U.K. firm. Autonomy is a software company based in Cambridge, England and San Francisco, California. It shares were traded on the London Stock Exchange until October 2011.

Autonomy provided enterprise software design and managed unstructured data such as emails, video and voice messages that are outside data bases. The firm promoted itself to investors and potential acquirers through its quarterly earnings releases. There it appeared to be a high-growth, high-margin, company with almost $1billion in revenue in 2010. Its executive sales team focused on meeting quarterly analyst consensus numbers.

Beginning in 2009, and continuing until late 2011 when the firm was acquired by Hewlett-Packard Company, senior executives at Autonomy’s headquarters crafted an executed a scheme to inflate the firm’s revenue, using over 30 transactions totaling almost $200 million.

The scheme centered on five U.S. value-added resellers of Autonomy software. Typically the sales involved took place when Autonomy was in the process of negotiating a sale to an end user but had not closed the deal by the end of the quarter. At that point Mr. Egan, acting on directions from the firm’s senior most finance executives, would approach the reseller and negotiate a deal under which the reseller purchased the software for 10% of the reseller’s purchase order to Autonomy. The reseller then supposedly could complete the deal with the identified end user. The revenue was booked.

The proposed transactions continued to be controlled by Autonomy. Thus Mr. Egan, acting on instructions from his superiors, told the resellers to avoid becoming involved in the transactions. Under these circumstances the resellers had no real risk.

Autonomy called these transactions “acceleration deals.” About 15% of the firm’s revenue came from them. Prematurely recording the revenue was not in accord with IFRS, the accounting principles applied by the firm. Mr. Egan’s actions contributed to the wrongful scheme, although he was acting on orders from his superiors, according to the Order.

Autonomy engaged in other wrongful accounting practices to bolster its revenue. For example, in at least five instances transactions were backdated to facilitate making revenue targets. In other instances the firm used round-trip transactions to funnel cash to resellers where a transaction had been unsuccessful and yielded no profit for the reseller but had been booked by Autonomy.

On August 18, 2011 HP acquired Autonomy. Throughout the process HP was encouraged to rely on the financial statement of Autonomy. The purchase prices was $11.1 billion, a 64% premium over Autonomy’s stock price at the time. By November 20, 2012 HP announced a non-cash impairment charge of $8.8 billion. Most of the charge was do to what the firm called the “serious accounting improprieties, misrepresentations and disclosure failures” of Autonomy. The Order alleges violations of Securities Act Section 17(a)(2).

To resolve the proceeding Mr. Egan consented to the entry of a cease and desist order based on the Section cited in the Order. He will also pay disgorgement of $800,669 (the value received in the merger for his firm shares) and prejudgment interest. A penalty was not imposed based on his cooperation in a Commission investigation and/or related enforcement action.

Program: On December 1, 2016 Dorsey will present it Third Annual Federal Enforcement Forum featuring panels discussing enforcement issues relating to the SEC, CFTC, FERC, EPA, DOJ and CFPB. The program is live in Washington, DC. and video cast. No charge for registration (here).

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by T. GormanPosted on Posted in SECActions

The Commission prevailed at trial against a corporate insider charged with tipping his friend prior to the announcement of favorable regulatory action on an application to market a drug. The friend not only traded but encouraged others to trade at a poker game and on Facebook. SEC v. Sabrdaran, Civil Action No. 3:14-cv-4825 (N.D. Cal.).

The action centered on the December 17, 2010 announcement that pharmaceutical company InterMune, Inc. had secured the recommendation of European regulatory authorities to market its drug Esbriet in the European Union. On the date of the announcement the share price of InterMune’s NASDAQ traded shares jumped 151% while the price for its call options increased by over 356%.

Defendant Sasan Sabrdaran, a resident of San Francisco, was the director of Drug Safety Risk Management at InterMune. He is a long time friend of defendant Farhang Afsarpour, a British citizen and resident of Manchester, England. Mr. Afsarpour owned a number of restaurants.

In March 2010 InterMune submitted an application for marketing approval for Esbriet to the European Medicines Agency or EMA. The application sought approval to market the drug in the EU. The approval process involves a number of steps and time periods prior to a recommendation for approval by the Medicinal Products for Human Use or CHMP, an advisory board to the EMA. Following the submission of the application InterMune maintained its public statements that it anticipated a CHMP opinion and EU decision in the first half of 2011.

The firm had a small team whose job was to shepherd the application through the regulatory process. Mr. Sabrdaran began working with the team in June 2010 following which he was continually updated. On June 15, 2010, July 23, 2010 and September 15, 2010 the group received communications indicating that the review was going better than the team had anticipated. On November 15, 2010 an EMA employee emailed an InterMune outside consultant that it was probable Esbreit would secure a “positive Opinion.” That view was confirmed over the next two days. The flow of positive information continued in early December 2010. Indeed, during the week of December 6, 2010 the EMA liaison confirmed to the Esbriet Team that the drug would be put up for a positive opinion during the CHMP’s meeting scheduled for the week of December 13, 2010. As the updates came in they were relayed to Mr. Sabraran.

Telephone and text messages indicate that prior to October 10 Mr. Sabrdaran began funneling information about the drug approval process to his friend, defendant Afsarpour. On October 11, 2010 Mr. Afsarpour opened a spread betting account with IG Index, a London based subsidiary of IG Group. Records indicate that subsequently the two men had additional communications.

On December 12, 2010 Mr. Afsarpour held “poker night” at his home. During the evening he announced to a half-dozen friends that they should purchase InterMune securities. He went on to note that the EU would, in his view, render a favorable opinion on the firm’s application to market a drug.

The next day Mr. Afsarpour sent a message on Facebook to a friend, indicating that he had good news — it is “not too late if you have money.” In follow-up communications Mr. Afsarpour agreed to purchase InterMune shares for his friend in exchange for the friend purchasing gold worth about $17,940 for him.

Between December 10, 2010 and December 16, 2010 Mr. Afsoour purchased spread bets on the stock as well as shares. The broker hedged the spread bet positions by purchasing InterMune securities. Following the December 16, 2010 announcement Mr. Afsarpour had profits of $877,369. Others that he tipped also had profits. The complaint alleged violations of Exchange Act Section 10(b). Following trial the jury returned a verdict in favor of the Commission and against Mr. Sabrdaran. Remedies will be considered by the court at a date to be set.

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