by T. GormanPosted on Posted in SECActions

Insider trading cases are built on two basic theories. Under the traditional, classic model, a corporate insider uses material, non-public information obtained from his or her employer to trade in shares of the company – inside information is used for a personal rather than a corporate benefit. Alternatively, under the misappropriation theory, material information about a firm is entrusted to a corporate outsider. That person wrongfully uses the information to trade in the securities of the firm, thereby converting information entrusted for a specific purpose to their personal benefit.

SEC v. Huang, Civil Action No. 15-cv-269 (E.D. Pa. Filed Jan. 22, 2015) fits within the misappropriation theory but is based on a strikingly different fact pattern than the typical case. The action is names as defendants Bonan Huang and Nan Huang, both employees of Capital One Financial Corporation. From about November 2013 through January 2015 the two defendants are alleged to have misappropriated material inside information from their employer and used that information not to trade in the shares of Capital One but those of retail establishments reflected in the credit card statements of Capital One card holders. The scheme generated over $2.8 million in trading profits in one of their accounts.

During the period the defendants were employed as data analysts by Capital One. Their task was to analyze transactions for possible fraudulent credit card activity. As such the pair had access to the customer data held by the financial institution. That included details on numerous consumer purchase transactions.

Using that access, the two defendants conducted thousands of searches of customer data, analyzing those retail transactions. The defendants accessed data regarding transactions at over 140 retail establishments that accepted Capital One credit cards. Prior to an earnings announcement by a retail store the defendants would retrieve data about a particular store from the charge accounts of Capital One card holders and analyze the sales trends. Trades were then placed in the securities of the company. This permitted the two defendants to successfully trade in the shares of the company in violation of the specific policies of their employer. The complaint provides three examples of unidentified stores in which the two defendants traded. A temporary freeze order was entered at the time the complaint was filed earlier this year. See Lit. Rel. No. 23179 (Jan. 22, 2015).

Subsequently, the two defendants consented to the entry of a preliminary injunction. That order essentially extends the initial temporary order. See Lit. Rel. No. 23216 (March 10, 2015).

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by T. GormanPosted on Posted in SECActions

Recently Julie M. Rieve, Co-chief, Asset Management delivered remarks titled Conflicts, Conflicts Everywhere to the IA Watch 17th Annual IA Watch Compliance Watch Conference (Feb. 26, 2015)(here). Conflicts are in fact the focus of many of the cases that have recently been brought involving investment advisers and other market professionals.

Ms. Rieve’s remarks might also have been seen as presaging the Commission’s most recent action involving an investment adviser, In the Matter of Edgar R. Page, Adm. Proc. File No. 3-1607 (March 10, 2015). There the Order names as Respondents Page One, a registered investment adviser, and its principal, Edgar Page, 95% owner, CEO and COO.

The Order centers on a late 2008 arrangement entered into by Mr. Page and a Fund Manager who managed a series of private investment funds. The two men entered into an agreement under which Fund Manager would acquire Page One for about $3 million. The payments would be made in installments over time. The agreement also stipulated that Mr. Page would refer Page One clients to the funds managed by Fund Manager. The acquisition would not close unless, and until, those clients had invested $20 million in the funds managed by Fund Manager.

Subsequently, the arrangement was modified. Under the new terms Fund Manager would only acquire 49% of Page One. While the purchase price was reduced, Mr. Page’s obligation to refer $20 million of business to the funds was not.

In preparing the Form ADVs for Page One – Mr. Page was the chief compliance officer – the deal to sell Page One was not disclosed. To the contrary, in the 2009 filing the firm told clients that it was not charging management fees because it was compensated by Fund Manager. That filing significantly understated the amount of that compensation. More importantly, it failed to disclose the arrangement under which Fund Manager would acquire the firm. Subsequently, amendments were made to the filings. The deal for Fund Manager to acquire Page One was not disclosed.

Eventually the deal collapsed. Mr. Page was unable to refer $20 million in business to the funds managed by Fund Manager. Likewise, Fund Manager did not comply with the purchase obligations.

The Order alleges violations of Advisers Act Sections 206(1), 206(2) and 207.

The Respondents partially resolved the proceeding. Each consented to the entry of a cease and desist order based on the Sections cited in the Order. Page One also consented to the entry of a censure. Further proceedings will he held to determine what monetary sanctions, if any, should be imposed.

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