by T. GormanPosted on Posted in SECActions

The SEC filed a fraud action based on the misappropriation of shares of a private firm held by investors through an LLC. The shares were then resold and reissued to other investors. SEC v. Kumar, Civil Action No. 23145 (N.D. Cal. Filed December 2, 2014).

Defendant Vinay Kumar Nevatia solicited real estate and securities investments through a number of entities he owned or controlled from 2007 through 2013. Previously, he had worked as an executive search consultant.

In August 2008 Mr. Kumar and eight other investors purchased 179,900 shares in CSS Corp. Technologies (Mauritius) Limited, a privately held technology company. Mr. Kumar, who knew one of the co-founders of the company, told investors that the shares were only available to those with personal connections to the firm. This was represented to be an exclusive, pre-IPO, opportunity.

To simplify the transaction, according to Mr. Kumar, the shares would be held through VRSBS Investments, LLC. The investors, who contributed $899,500, became the sole members of the firm along with Mr. Kumar who invested $25,000 or less than 3% of the total funds.

VRSBS was governed by a document titled “Operating Agreement of BRSBS Investment, LLC.” That agreement stated that the sole purpose of the entity was to buy and hold CSS shares for the benefit of its members. Mr. Kumar, as the managing member, was required to provide other members with a description of the material terms of any potential sale and was prohibited from commingling his proceeds with personal accounts. Investors then requested that certificates be issued reflecting the number of shares owned by each individual investor. This would permit each investor to have a certificate as evidence of the investment. Mr. Kumar made the necessary arrangements.

In November 2011 Mr. Kumar sold about half of the CSS shares originally purchased by the VRSBS investors to three directors of a venture capital firm. The directors agreed to pay $359,800 for 89,950 CSS shares. The funds were not wired to VRSBS. Rather, Mr. Kumar arranged for the payment to be directed to his personal trust bank. When the directors requested the share certificates Mr. Kumar claimed that all of the stock was in one certificate which would have to be reissued.

Three months later, on February 16, 2012, Mr. Kumar entered into an agreement to sell another 25,000 CSS shares. This agreement was with two of the venture capital firm directors. The sales price was $100,000. Six days later Mr. Kumar agreed to sell another 60,000 CSS shares for $195,000, this time to a Cayman Islands private equity fund managed from Hong Kong. Both sales were of shares held by VRSBS. The venture capital directors wired payment to a bank account controlled by Mr. Kumar. The fund wired its payment to VRSBS. Virtually all of the funds were then diverted by Mr. Kumar to his account.

When the fund requested stock certificates, Mr. Kumar arranged for the reissuance of the CSS shares. He represented to the firm and its transfer agent that the original shares had been lost. Eventually the shares were reissued.

While the shares were being reissued, Mr. Kumar told the original investors that he was going to have new certificates issued in the name of each investor. He also told them that CSS was planning to conduct a potentially lucrative IPO.

In July 2013 some of the original investors learned from CSS that Mr. Kumar had sold nearly all of the shares. When confronted with these facts, Mr. Kumar claimed that he had only temporarily transferred the shares to protect them from his creditors. He then stopped communicating with the investors.

The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 23145 (December 2, 1014).

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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