by T. GormanPosted on Posted in SECActions

The Commission filed another settled action based on undisclosed conflicts involving an investment adviser. In this proceeding Respondents, principals of the adviser, failed to disclose a fee splitting arrangement with an executing broker. In the Matter of Gavornki, Adm. Proc. File No. 3-16286.

The proceeding centers around the relationship between registered investment adviser Concord Equity Group Advisers, LLC, Executing Broker and Tore Services, LLC, another broker-dealer. The owner of Concord is Concord Capital which is majority owned indirectly by the three Respondents, Lee Argush, Alan Gavornik and Nicholas Mariniello. Tore, formed in 2008, is also owned by Concord Capital. Mr. Argush was the CEO and CFO of Concord and Tore. Mr. Gavornik served as Concord’s executive managing director and CCO while Mr. Mariniello was Concord’s and Tore’s executive managing director and president.

In 1999 Respondents initiated the Concord Platform. It was intended to guide Concord’s clients through customized portfolio research, design and selection. It also permitted the clients’ portfolio managers to monitor and rebalance investment portfolios. Those clients were largely small and medium sized banks and trusts. In addition, Concord offered access to sub-advisers that were incorporated into the Platform.

Tore was formed to execute trades for clients and sub-advisers on the Platform. In 2008 Executing Broker contacted Concord regarding execution services. By October of that year an agreement was reached under which those who used the Platform would be referred to Executing Broker who would charge a commission of $0.04 to $0.06 per share. Of that amount $0.01 per share would remain with Executing Broker while the balance would be paid to Tore as a referral fee. An agreement captioned Commission Sharing Agreement for Referrals was executed.

Under the Referral Agreement most of the client paid commissions went to Tore. Indeed, from the time the arrangement was entered into until 2011 when Concord was acquired, Tore obtained $1,005,000 in revenues from the arrangement – about 90% of the commissions collected by Executing Brokers.

The terms of the Referral Agreement were never fully disclosed in the filings made by Concord with the SEC. For the first 12 months the arrangement was in place the firm’s ADV Part II contained no discussion of the arrangement. In an ADV Part II filed in November 2009 and again in March 2010 there was a reference to a referral fee arrangement involving Tore but the details regarding the agreement were not included. Likewise, and August 2010 filing, made after an examination by the staff, referenced the arrangement and noted that Tore “may” receive referral fees but again failed to detail the nature of the arrangement. Mr. Gavornik was primarily responsible for the filings. The Order alleges willful violations of Advisers Act Sections 204(a), 206(2) and 207.

Respondents resolved the proceeding, with each consenting to the entry of a cease and desist order based on Advisers Act Section 206(2). The order as to Mr. Gavornik is also based on the other Sections cited in the Order. In addition, he agreed to the entry of an order barring him from serving in any capacity with an investment adviser or registered investment company for a period of twelve months and suspending him from participating in any penny stock offering for the same period. Respondents were also ordered to pay disgorgement of $41,005,000 and prejudgment interest on a joint and several basis and each was directed to pay a penalty of $150,000.

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by T. GormanPosted on Posted in SECActions

After bringing a series of insider trading cases as administrative proceedings in recent weeks, the Commission returned to its more traditional approach. The agency filed settled insider trading charges against a CEO and restaurant manager in federal district court. SEC v. Redmond, Civil Action No. 23138 (November 21, 2014).

The action centers on the acquisition of GenTek, Inc., a manufacturer of chemical products and commercial engine components, by a subsidiary of investment funds managed by American Securities, through a tender offer announced on September 28, 2009. The defendants are William Redmond, Jr., a member of GenTek’s board and its CEO, and Stefano Signorastri, the manager of a Manhattan restaurant.

Messrs. Redmond and Signorastri met in about 2004. Mr. Redmond was dining at Restaurant A which is managed by Mr. Signorastri. Subsequently, the two men became friends. Mr. Redmond frequently dined at Restaurant A. The two men also socialized on other occasions. During their periodic conversations Mr. Redmond frequently discussed business and personal matters. This was contrary to GenTek’s written policy which precluded discussing business matters except for a “legitimate purpose.” Here Mr. Redmond did not have a corporate or other business purpose for discussing firm business with the manager. By doing so, Mr. Redmond breached firm policy and his fiduciary duty. Mr. Signorastri knew that his friend was the CEO of GenTeck.

GenTeck had engaged in discussions regarding a possible sale of the firm for a number of years. In 2008 there were discussions with two competitors regarding a possible business combination. A confidentiality agreement was executed and information exchanged. Mr. Redmond was involved in the discussions.

Between August 19 and September 18, 2008 Mr. Signorastri purchased 10,000 shares of GenTeck in accounts he opened at the time. He had never purchased shares in the firm and this investment was significant for him compared to his income. Individual A, who worked at Restaurant A, purchased 100 shares of GenTeck after Mr. Signorastri furnished him with material non-public information obtained from Mr. Redmond.

By the end of September 2008 the negotiations terminated. Mr. Signorastri continued to hold his shares in the firm.

Subsequently, GenTeck entered into negotiations with American Securities which eventually resulted in the tender offer:

  • June 19, 2009: American Securities delivered a preliminary offer to the company;
  • July 7: The offer was increased from $30 to a range of $35 to $38 per share;
  • In July 2009 Mr. Redmond told the manager that there were merger negotiations;
  • Between June 19, 2009 and the end of September Mr. Redmond dined at Restaurant A seven times;
  • July 17, 2009: Mr. Redmond met with representatives of American Securities regarding their proposal at Restaurant B where Individual B worked; after the meeting, Mr. Redmond told Individual B that his lunch meeting was with people who wanted to buy the company;
  • July 21, 2009: A confidentiality agreement was executed following another meeting;
  • July 29, 2009: American Securities revised its proposal, offering $37 per share;
  • July 30, 2009: Individual B purchased 170 shares of GenTeck stock;
  • August 3, 2009: Mr. Redmond informed the board that Goldman Sachs may be interested in serving as the firm’s financial adviser;
  • From August 3 to August 5 Mr. Redmond called Mr. Signorastri each day.
  • August 6, 2009: American Securities increased its offer to $38 per share and GenTech received an offer from a new bidder;
  • August 6, 2009: Mr. Signorastri purchased 2,000 additional shares;
  • August 7, 2009: GenTech rejected the offer from the new bidder and gave American Securities a 30 day exclusivity period;
  • August 11, 2009: Due diligence began along with negotiations regarding the final documents;
  • September 21: American Securities advised Mr. Redmond that due diligence was largely complete;
  • September 23: Mr. Redmond spoke with the manager while dining at the establishment he managed;
  • September 25: Individual A purchased 250 additional shares; and
  • September 28, 2009: The transaction was announced.

After the transaction was announced, the share price closed up nearly 40%. On October 30, 2009 Mr. Signorastri tendered his shares as did Individual A. They had profits of, respectively, $164,260 and $3,672. Individual B had trading profits of $2,490.

The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). To settle the charges, Mr. Redmond agreed to pay disgorgement of $149,139 representing the illicit profits of the two traders and most of the trading profits by Mr. Signorastri. Mr. Redmond will also pay prejudgment interest, a penalty of $64,821 and be barred from serving as an officer or director for five years. Mr. Signorastri agreed to pay the remaining disgorgement of $21,283 and a penalty of $59,609. See Lit. Rel. No. 23138 (November 21, 2014).

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