by T. GormanPosted on Posted in SECActions

The Manhattan U.S. Attorney’s Office and the SEC continued their war on insider trading with additional actions against portfolio managers. In their most recent cases they allege that the two traders obtained inside information from consultants who retained contacts that supplied the information from their former employer, the Food and Drug Administration and the Centers for Medicare and Medicaid Services. SEC v. Valvani (S.D.N.Y. Filed June 15, 2016);

Valvani names as a defendant Sanjay Valvani, a partner at an Investment Adviser and a portfolio manager with trading authority over a portion of the Balanced Fund. Also named as a defendant is Gordon Johnston, formerly an employee of the FDA and, more recently a consultant to the Investment Adviser and a Vice President for the Generic Drug Trade Association.

By 2005 there was considerable speculation as to whether the FDA would approve any of exnoxaparin Abbreviated New Drug Applications or ANDA. Investment Adviser hired Mr. Johnston to advise Mr. Valvani on the issue. Accepting that position was contrary to the policies of the Trade Association where he was employed. The Association required that he work full time.

While there was little movement on the applications for years, by 2009 Mr. Johnston learned from a long time friend at the FDA that an enoxaparin ANDA was moving toward approval. Mr. Johnston obtained the information in confidence and did not disclose his role as a consultant to a hedge fund. Nevertheless, he informed trader Valvani. Both recognized the significance of the information. Trader Valvani had the Fund take a long position in Momenta Pharmaceuticals, Inc. and a short position in Sanofi S.A in late July 2010 despite the fact that the policies and procedures of the Investment Adviser precluded trading on inside information. When the FDA announcement was made the Fund had realized and unrealized trading profits of about $24.8 million.

Later in 2010 Mr. Johnston learned that another enoxaparin ANDA application would be approved. Mr. Valvani used this information to formulate a trade for the Balanced Fund to sell the shares of Momenta short. When Watson Pharmaceuticals, Inc. announced in mid-September 2011 that its ANDA application had been approved by the FDA the Fund had realized and unrealized profits of about $7 million. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 204A. The action is pending.

Plaford names as a defendant Christopher Plaford, a partner at Investment Adviser and a portfolio manager for the Credit Fund. He also managed a portion or “sleeve” of assets in the Balanced Fund. Between March 1, 2010 and July 23, 2010 Mr. Plaford traded profitably on behalf of the Credit Fund in credit default swaps linked to Sanofi, betting that the firm’s revenues and creditworthiness would decline when the FDA approved a generic drug that would compete directly with Sanofi’s Lovenox. The trade resulted in profits of about $26,000. The information came from Mr. Johnston. Mr. Plaford knew that ultimately the information came from an FDA official who had furnished it to consultant Johnston.

Three years later, on May 30, 2013, Mr. Plaford learned from a paid Political Consultant that CMS was expected to propose a cut to the Medicare reimbursement rates for certain home health service. The next day Mr. Plaford caused Investment Adviser to enter into an advisory services agreement with Political Consultant’s firm. Two weeks later Political Consultant informed Mr. Plaford that CMS would in fact propose a rate cut. He understood the information came from a CMS official. After receiving the information Mr. Plaford adjusted certain positions for the Credit Fund and Balanced Fund based on the information. Following the announcement the two funds had profits of $285,000.

Mr. Plaford, along with another portfolio manager, Stefan Lumiere, manipulated the valuation procedures of the advisory firms for Credit Fund, using sham broker quotes to mismark securities held by the it. As a result, the valuations at month end of the securities held by the Fund were inflated; the NAVs were inflated; Credit Fund overstated its reported month-end and annual performance; and certain distressed assets held by the Fund were misclassified. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 206(4) and 204A. The case is pending. See also SEC v. Lumiere (S.D.N.Y. Filed June 15, 2016)(action against Mr. Lumiere based on the mismarking scheme described above; the complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4)).

The U.S. Attorney’s Office for the Southern District of New York filed parallel criminal actions.

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by T. GormanPosted on Posted in SECActions

The SEC has been focusing on municipal bond offerings, filing a series of enforcement actions. An action brought this week is the first, however, based on the Dodd-Frank fraud section related to municipal advisers. The action center on the use of what the Orders allege is confidential information. In the Matter of School Business Consulting, Inc., Adm. Proc. File No. 3-17288 (June 13, 2016).

Respondents in the proceeding are Terrance Bradley, a 26 year veteran of a California school district and the founder of School Business Consulting. The firm was formed after his retirement from the school system to serve as a consultant for school districts.

In September 2010 Keygent LLC, a registered municipal adviser whose business focuses solely on advising school districts and community colleges regarding bond issues, retained School Business. The firm was named to Keygent’s Advisory Board and was paid a monthly fee. This gave the adviser access to the extensive contracts of Mr. Bradley throughout the California school system.

Among the clients solicited for Keygent were those of School Business. In some instances Mr. Bradley reviewed pitch books used by Keygent before they were sent to the school districts. In other instances he separately recommended to his clients that they meet with Keygent.

During the hiring process for five School Business clients, Keygent received confidential information about them from the firm. California law did not require a bidding process but many districts used one. Each of the candidates for the municipal advisor position were expressly directed not to have contact with any officials at the district except the single official specified in the RFQ. This limitation was intended to permit the districts to control the information disseminated, placing each candidate on the same footing. Mr. Bradley had drafted, or assisted in drafting, the RFQ documents used by five school districts.

Mr. Bradly provided what is alleged to have been confidential information to Keygent. That included advanced copies of draft interview questions; a draft of the RFQ document for one district which later incorporated a suggestion made by the adviser that required a competitor to disclose negative information; information about competitors; and advice on how to answer certain interview questions.

The school district clients were not aware that Mr. Bradley shared the information

with Keygent, although he did advise them of his affiliation with the firm and recused himself from the actual interview process for four of the five districts (one insisted he attend despite Mr. Bradley’s statement that he had a conflict). Mr. Bradley was not authorized to share the information.

Based on the foregoing School Business was engaged in the solicitation of a municipal entity, according to the Order. Accordingly, it was required to register as a municipal advisor under Exchange Act Section 15B(a)(1). Under Section 15B(c)(1) such an adviser has a fiduciary duty to its municipal entity clients. MSRB Rule G-17 requires that in the conduct of its municipal securities business every broker, dealer, municipal securities dealer and municipal adviser deal fairly with all persons and not engage in unfair, deceptive or dishonest conduct. Likewise, Exchange Act Section 15B(a)(5) prohibits fraudulent and deceptive practices while undertaking the solicitation of a municipal entity. The Order alleges violations of these Sections.

To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on Exchange Act Sections 15B(a)(1)(B), 15B(A)(5) and 15B(c)(1) and MSRB Rule G-17. Mr. Bradley was barred from the securities business. School Business was censured and will pay a penalty of $30,000. Mr. Bradley will pay a penalty of $20,000. See also In the Matter of Keygent LLC, Adm. Proc. File No. 3-17287 (June 13, 2016)(proceeding against the adviser and Anthony Hsieh and Chet Wang, both managing directors of the firm; the proceeding is based on the conduct detailed above; the firm agreed to a series of undertakings; Respondents consented to the entry of a cease and desist order based on Exchange Act Sections 15B(a)(5) and 15B(c)(1) and MSRB Rule G-17. The firm will pay a penalty of $100,000, Mr. Hsich $30,000 and Mr. Wang $20,000).

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