by T. GormanPosted on Posted in SECActions

The SEC and the DOJ have waged an aggressive battle against insider trading for years, resulting in a string of courtroom victories, guilty pleas and settlements as well as significant sanctions which are supposed to deter future wrongful conduct. Nevertheless, corporate executives keep trading on inside information as evidenced by the SEC’s most recent insider trading action, SEC v. Donnelly, Civil Action No. 4:14-cv-01970 (E.D. Mo. Filed November 25, 2014).

This action centers around the acquisition of Solutia, Inc. by Eastman Chemical Company, announced on January 27, 2012. Solutia is a manufacturer of performance materials and specialty chemicals. Eastman is a manufacturer of a range of advanced materials, additives and functional product, specialty chemicals and fibers. D. Michael Donnelly was the chief operating officer of Solutia.

In July 2011 the CEO of Eastman contacted his counterpart at Solutia regarding a possible transaction between the two companies. The next month, the two executives met and over dinner. Eastman’s CEO expressed an interest in acquiring Solutia.

At a second dinner on October 25, Eastman’s CEO made an offer of $23 per share for Solutia. On the same day Mr. Donnelly and a small group of company executives were made aware of Eastman’s offer to purchase the company. Although that offer represented a 46% premium to market on the day it was made, on November 2, 2011 Solutia’s CEO told Eastman’s CEO that the company was not for sale at that price. Eastman expressed continuing interest.

On November 18, 2011 Eastman’s CEO sent a letter to Solutia’s CEO proposing that the acquisition be completed at an implied value of $25.75 per share. The offer was composed of cash and stock. It represented a 60% premium over the prior day’s closing price. That same day Mr. Donnelly learned that an improved offer was going to be submitted. He began purchasing shares of the firm in the brokerage accounts of his children. By November 22 he had acquired 8,130 shares. When the offer was considered by the Solutia board and its advisers at meeting held on December 5 and 6 it was rejected as inadequate. That decision was communicated to Solutia’s CEO on December 7, 2011.

Since Eastman’s CEO continued to express an interest in the deal, a confidentiality agreement was executed two days later. Due diligence was scheduled to begin in January. Toward the end of that month Solutia’s board met and authorized the firm’s CEO to respond to Eastman with a price between $28 and $28.50 per share. After a series of discussions the parties arrived at a price of $27.65 in cash and securities. On the evening of January 26, 2012 the boards of each company approved the deal. The next morning a joint press release announcing the transaction was issued. The stock price close up 41% at the end of the day. Mr. Donnelly sold all of the shares he had purchased early in February 2012, yielding a profit of $104.391. The complaint alleges violations of Exchange Act Section 10(b).

Mr. Donnelly settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). In addition, he agreed to pay disgorgement in the amount of his trading profits, prejudgment interest and a penalty equal to the amount of the disgorgement. He also agreed to the entry of a bar prohibiting him from serving as an officer and director of a public company. See Lit. Rel. No. 23142 (Nov. 25, 2014).

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by T. GormanPosted on Posted in SECActions

A Swiss unit of U.K. financial services giant HSBC Holdings plc. settled charges that the firm repeatedly sold securities and rendered advisory services in the U.S. without registering with the Commission despite legal advice to the contrary. Although the wrongful conduct ended in 2011 in the wake of government enforcement actions against another Swiss financial giant, the firm was required to admit violations of the federal securities laws and the underlying conduct as part of a settlement of the charges. In the Matter of HSBC Private Bank (Suisse), SA, Adm. Proc. File No. 3-16288 (November 25, 2014).

Respondent HSBC Private Bank is the product of a 2009 merger between HSBC Private Bank and HSBC Guyerzeller Bank, both of which were based in Switzerland. From 2003 through 2008 the two entities operated independently, although their operations were at least in part similar. Both were part of Group Private Banking which was ultimately governed by HSBC Holdings.

From at least 2003, and continuing until 2011, the two banking entities engaged in broker-dealer and investment adviser activities in the United States. Each unit had relationship managers who solicited, established and/or maintained brokerage and investment advisory accounts in this country. They also solicited, accepted and executed orders for securities transactions. During the period the two banking entities as many as 368 U.S. client accounts. The U.S. client accounts had as much as $775 million under management and were serviced by as many as 100 relationship managers located in Geneva and Lugano. Those managers made more than 40 trips to the U.S. to meet with clients during the period.

In October 2003 HSBC Private Bank (prior to the merger) sought advice from an outside law firm regarding compliance with U.S. law. Subsequently, the firm created a dedicated North American desk. Operations in the U.S. were to be consolidated through the desk in a manner that complied with the applicable law in this country. A June 2005 audit of the operations demonstrated that, although all U.S. accounts were required to be consolidated on the desk by April 1, 2005, in fact the actions had not been taken and the firm was not fully compliance with U.S. law. Despite continuing efforts to bring the operation into compliance, by 2008 the firm still had 156 U.S. client accounts that held securities.

HSBC Guyerzeller, prior to the merger, had similar operations and also took steps to ensure compliance with U.S. law which were not fully implemented. During the period the unit had as many as 176 U.S. client accounts that held securities. In 2001 the firm sought advice from a U.S. law firm regarding compliance with United States law. Despite a series of efforts by the firm over a period of time, by 2008 U.S. accounts that had been expected to be closed remained open.

In 2008 the two firms planned to, and did, merge. During the process, UBS AG, a large Switzerland-based multinational financial services company, announced that it would cease providing banking services to U.S. client. The announcement came in the mist of well-publicized civil and criminal investigations into the firm’s operations which related in part to the provision of cross-boarder banking, broker-dealer and investment advisory services to U.S. clients.

In February 2009 the merged HSBC units decided to exit part of the U.S. market. Nearly all of HSBC Private Bank’s U.S. client accounts were closed by the end of 2011. The Order alleges violations of Exchange Act Section 15(a) and Advisers Act Section 203(a).

To resolve the proceeding Respondent admitted to violating the federal securities laws and to the facts detailed in the Order and consented to the entry of a cease and desist order based on Exchange Act Section 15(a) and Adviser Act Section 203(a) as well as a censure. In addition, the firm will pay $5,723,193 in disgorgement, prejudgment interest and a civil penalty of $2.6 million.

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