by T. GormanPosted on Posted in SECActions

A continuing focus of SEC enforcement is compliance by entities with their disclosed procedures. The Commission’s latest action in this regard resulted in the payment of nearly $6 million by a Credit Rating Agency that not only failed to comply with its disclosed procedures but lacked the required personnel. In the Matter of DBRS, Inc., Adm. Proc. File No. 3-16922 (October 26, 2015).

DBRS has been a registered NRSRO since 2007. The firm publishes methodologies for its surveillance of outstanding U.S. RMBS ratings. In 2008 the firm published its Surveillance Methodology. It was modified the next year. Under the disclosed methodology the firm stated that analysts would conduct surveillance regarding each outstanding RMBS and re-securitized real estate mortgage investment conduits or Re-REMIC using a three step process. In addition, monthly a surveillance committee would review the ratings and assumptions would be updated to reflect market trends and disclosed on the firm’s website prior to their implementation.

The firm did not follow its disclosed process:

  • For a two year period beginning in early 2009, only one analyst was employed who was primarily responsible for most of the surveillance of the two groups of securities; the analyst flagged underperforming pools but then waited for the surveillance committee to meet which could be months later;
  • The analyst did not perform the analysis of individually rated RMBS tranches;
  • The firm did not monitor on a monthly basis Re-REMICs which were more complex because it lacked the necessary personnel; and
  • Beginning in early 2009, and for the next two years, the analyst did not complete the entire three step process.

By February 2011 the firm’s executive committee was aware that the disclosed procedures were not being followed.

In July 2009 the firm updated most of its loss severity assumptions for the mortgage pool types and vintages that constituted the collateral for RMBS and Re-REMICs. Although the firm had represented that updates would be disclosed they were not.

The Order alleges violations of Exchange Act Sections 15E(b)(1)(failing to update NRSRO application), 15E(b)(2)((failing to list material changes in annual NRSRO certification), 15E(c)(3)(A)(internal controls), 15E(d)(1)(E)(failure to maintain adequate resources) and 17(a)(books and records).

To resolve the proceeding the firm agreed to implement a series of undertakings including the retention of an independent consultant who was assigned specific duties. DBRS also consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. In addition, the firm will pay disgorgement of $2,742,000, prejudgment interest and a penalty of $2,925, 000. Collectively the disgorgement, prejudgment interest and penalty total nearly $6 million.

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by T. GormanPosted on Posted in SECActions

The scheme was perfect. Broker Vladimir Eydelman of Oppenheimer & Co. would place the trades; law school graduate Steven Metro, a clerk at Simpson Thatcher, would misappropriate the inside information; mortgage broker Frank Tamayo, a law school class mate of Mr. Metro would be the go-between – information source Metro would not meet with trader Eydelman.

The scheme was profitable. Beginning in February 2009 the ring traded on inside information 13 times, garnering $5.6 million in illicit insider trading profits. The scheme involved a series of steps:

  • Mr. Metro accessed the law firm’s computer system to identify possible corporate transactions. Once the information was obtained he would ask Mr. Tamayo to meet in person.
  • Messrs. Metro and Tamayo typically met at a New York City coffee shop. Mr. Metro would show his friend his cell phone screen on which he displayed the names and/or ticker symbols of the two companies involved and then point to the name of the acquirer. The approximate price and the announcement date were also conveyed.
  • Messrs. Eydelman and Tamayo would meet later near the information booth in Grand Central Station. There Mr. Tamayo would walk up to the broker, show him a post-it or napkin with the name of the company written on it and then either chew the paper up or eat it.
  • Mr. Eydelman returned to his office and researched the company. Reports with a recommendation would be transmitted to Mr. Tamayo. The stock would be purchased.

The schemers got caught. Despite the precautions the scheme unraveled into civil and criminal insider trading charges. See, e.g., SEC v. Eydelman (D.N.J. Filed March 19, 2014); SEC v. Tamayon (D. N. J. Filed September 19, 2014).

Mr. Eydelman settled with the Commission. He consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(e). In addition, he agreed to disgorge $1,236,657 in trading profits which will be deemed satisfied by the entry of orders of forfeiture or restitution in the parallel criminal case. In that action Mr. Eydelman pleaded guilty. He also agreed to pay a civil penalty equal to the trading profits and prejudgment interest. See Lit. Rel. No. 23391 (October 23, 2015).

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