by T. GormanPosted on Posted in SECActions

Earlier this month the SEC brought an insider trading case against Zachary Zwerko, a financial analyst at a pharmaceutical company identified only as Pharma Co. SEC v. Zwerko, Civil Action No. CV 8181 (S.D.N.Y. Filed Oct. 10, 2014). The Manhattan U.S. Attorney’s Office brought parallel criminal charges. Now the SEC has amended its complaint, adding David Post, who is identified as the person who placed the trades, and additional facts about the scheme. The U.S. Attorney also brought criminal charges against Mr. Post.

Zachary Zwerko was a senior financial analyst at Pharma Co. His job responsibilities included conducting analysis in support of business combination and divestiture opportunities. Accordingly, he had access to a shared drive that contained confidential project folders regarding potential transactions.

Mr. Zwerko’s longtime friend is David Post, a 2008 classmate at business school. The two men have maintained a social relationship since school.

Mr. Post purchased shares of Idemix Pharmaceuticals, Inc. in advance of the June 9, 2014 pre-market announcement that Pharma Co. had agreed to acquire the firm. The take-over deal traces to April 2014 when the two firms entered into confidential, non-public discussions regarding a potential business combination. By mid-May confidentiality and standstill agreements were executed.

Mr. Zwerko did not work on the Idenix transaction. By May 5, 2014, however, he began accessing confidential information about the deal. Those documents referenced the deal by a code name. On May 20 Mr. Zwerko’s supervisor sent him and others an email chain that referenced the deal, noting that a few days earlier a non-binding offer had been made. The lead email referenced the discount rates used for financial modeling and cited Idenix. The chain discussed the acquisition, using the code name.

Minutes after receiving the e-mail, Mr. Zwerko accessed Yahoo Finance for Idenix from his work computer. Later that day he reviewed headlines about the company. That evening he accessed folders relating to the deal at the office. Mr. Zwerko then sent a text to his Mr. Post. Later that evening, the two friends spoke on the phone. Two minutes after the call ended Mr. Post placed an order for 1,000 shares of Idenix. Although it was not executed, starting the next day Mr. Post purchased shares, investing over $219,000.

Mr. Zwerko continued to access confidential material about the deal at work and contact his friend:

  • On May 21, 2014 the analyst accessed a confidential file at work that contained a revised offer and noted the proposed deal would go to the board on May 27;
  • On June 3, Mr. Zwerko accessed another confidential file on the deal;
  • On June 3, a few hours after accessing the file, Mr. Zwerko called Mr. Post; and
  • On June 4, 5 and 6 Mr. Post purchased additional shares.

Following the deal announcement Mr. Post sold his shares, reaping profits of about $579,000.

In 2012 Mr. Zwerko is also alleged to have tipped his friend in advance of another deal. This time it was the April 23, 2012 pre-market open announcement that Ardea Biosciences, Inc. had agreed to be acquired by AstraZeneca PLC. In the months prior to the deal announcement, Aredea engaged in a series of confidential discussions with several companies, including Pharma Co., regarding possible acquisitions. Mr. Zwerko worked on the proposed deal. Although Pharma did not acquire Areda, the firm participated in the negotiations until at least a week prior to the announcement.

During the negotiations Mr. Zwerko and Mr. Post spoke on the phone. For example, on February 27, 2012, there was an internal meeting at Pharma regarding a non-binding offer to Ardea. Hours after the meeting Mr. Zwerko called his friend’s cell phone. The next day Mr. Post began purchasing Ardea securities. Ultimately he purchased 9,800 shares through three brokerage accounts. Following the deal announcement he had trading profits of over $105,000.

During the scheme the two men took a number of steps to conceal their activity. For example, they used burner cell phones. Messrs. Zwerko and Post also used a dummy e-mail account. When one wanted to convey information to the other through the account he would draft an e-mail in code and leave it in the draft folder. After the e-mail was read the other would delete it. The two men also used coded text messages.

The profits from the trading were split. After the Idenix trades Mr. Post gave his friend $50,000 in cash as partial payment for the tips. The cash was handed to Mr.. Zwerko in a shoebox during a visit to Mr. Post’s new home. After the trades in Ardea Mr. Post gave his fried $7,000 as partial payment at his annual Halloween party.

The Commission’s complaint alleges violations of Exchange Act Section 10(b). The criminal case alleges one count of conspiracy to commit securities fraud. Both cases are pending.

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by T. GormanPosted on Posted in SECActions

Rengan Rajaratnam settled his insider trading case with the SEC this week, consenting to the entry of a permanent injunction and agreeing to pay disgorgement, prejudgment interest, a civil penalty and to be barred from the industry with a right to reapply after five years. The settlement follows Mr. Rajaratnam’s victory in the criminal insider trading action brought against him.

SEC enforcement this week brought two new administrative proceedings. Once centered on an offering fraud while the other focused on a breach of duty.

SEC

Rulemaking: The SEC, along with the Board of Governors of the Federal Reserve, the Department of Housing and Urban Development, the FDIC, FHFA and the Office of the Comptroller announced the adoption of rules implementing risk retention requirements regarding securitizations under the Dodd-Frank Act (here).

SEC Enforcement – Filed and Settled Actions

Statistics: This week the SEC filed 0 civil injunctive action and 2 administrative proceedings, excluding 12j and tag-along-actions.

Insider trading: SEC v. Rajaratnam, Civil Action No. 13 cv 1894 (S.D.N.Y.) is a previously filed action against Rengan Rajaratnam, the brother of Galleon hedge fund founder, Raji Rajaratnam. The action centered on insider trading claims involving 15 companies and nearly $100 million in illicit trading gains. The action was resolved this week when Mr. Rajaratnam consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). In addition, he agreed to pay disgorgement of $372,264.42, prejudgment interest and a penalty equal to the amount of the disgorgement. He also agreed to be barred from the securities business with a right to apply for reentry after five years. Previously, Mr. Rajaratnam prevailed in the criminal insider trading case brought against him, handing the Manhattan U.S. Attorney’s Office its only insider trading loss in this group of cases.

Financial fraud: SEC v. Subaye, Inc., Civil Action No. 13 Civ. 3114 (S.D.N.Y.) is a previously filed action against the company and James Crane who served as its CFO. The complaint alleged that the company, which claimed to be a PRC based cloud computing enterprise, was in fact little more than a shell. Mr. Crane, a former auditor barred by the PCAOB, signed a series of false filings made with the Commission. This week the Court entered a permanent injunction by consent prohibiting future violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and Section 105 of the Sarbanes Oxley Act. In addition, the order bars Mr. Crane from serving as an officer or director of a public company for ten years and requires him to pay a penalty of $150,000. See Lit. Rel. No. 23116 (October 21, 2014).

Offering fraud: In the Matter of Anthony Coronti, Adm. Proc. File No. 3-161203 (October 17, 29014). Respondent Coronti controls, Bidtoask LLC, also named as a Respondent in the proceeding. He claims to be the chairman and CEO of Corsac Inc., an investment adviser to a fund. From 2008 through 2011 Mr. Coronati offered investors units in a fund which supposedly invested in U. S. equity securities. Eleven investors purchased units. There was no fund, according to the Order. When the money ran out, Mr. Coronati moved on. In another iteration of the scheme, Mr. Coronati offered investors shares in a fund at a price of $5 per share. This time investors were told that the funds would be invested a fund that would conduct an IPO in the third quarter of 2012. Again, when the investor funds were drained, Mr. Coronati move on. In early 2012 Mr. Coronati began soliciting investors to purchase shares in a fund that held pre-IPO Facebook shares. This investment was offered through Bidtoask. Approximately $1.75 million was raised from 44 investors. This time the investment was made and the proceeds were distributed to investors, minus sums misappropriated by Mr. Coronti.

Finally, for about one year, beginning in mid-2013, Respondents offered investments in two privately-owned technology companies. One was going to conduct an IPO investors were told. Rather than invest the funds as represented however, Respondents misappropriated the money. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). Respondents resolved the proceeding, each consenting to the entry of a cease and desist order based on the Sections cited in the Order. Mr. Cononati was also barred from the securities business and will pay disgorgement of $292,646.36, prejudgment interest and a civil penalty of $100,000. A fair fund will be created for investors.

Misappropriation: SEC v. Wright, Civil Action No. 1:14-cv-01896 (M.D. Pa.) is a previously filed action against registered representative Dennis Wright. The complaint alleged that Mr. Wright induced 28 customers to redeem securities held in their accounts that were then reinvested in what was supposed to be accounts with a higher yield. Instead of reinvesting the money, Mr. Wright misappropriated it. Now the Court has entered a final judgment by consent, prohibiting Mr. Wright from engaging in future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, he was ordered to pay disgorgement of $1,533,416.33 and prejudgment interest which will be deemed satisfied by the entry of an order of restitution in a parallel criminal case. See Lit. Rel. No. 23115 (October 17, 2014).

Breach of duty: In the Matter of Clean Energy Capital, LLC, Adm. Proc. File No. 3-15766 (October 17, 2014) is a proceeding which names the previously registered adviser and its co-founder, Scott Brittenham, as Respondents. The Order alleges violations of Securities Act Section 17(a)(2) and Advisers Act Sections 206(2) and 207. CEC marketed 19 separate private equity funds to investors using Ethanol Capital Partners, L.P. Each fund was marketed as a separate series, labeled by a letter such as Fund A. Respondent also marketed the Tennessee Ethanol Partners, L.P. Collectively the 20 CEP Funds raised $64 million from hundreds of investors. The Order alleges a series of violations including the misallocation of expenses which included Mr. Bittenham’s salary, creating an undisclosed conflict; unauthorized borrowings and undisclosed principal transactions; misstatements in connection with a sale to one investors; the improper comingling of cash belonging to the Funds and improper compliance procedures. The Respondents resolved the action and entered into a series of undertakings. Those included the retention of an independent consultant whose recommendations will be adopted. In addition, each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order, to a censure and to pay disgorgement of $1,918,157.00 along with prejudgment interest. Respondents will also pay a penalty of $225,000. Portions of the disgorgement will be returned to certain Funds.

Criminal cases

Investment fund fraud: U.S. v. Elmas, No. 1:14-cr-00358 (E.D. Va.). Ismail Elmas , a FINRA registered investment adviser, at one time was employed as an investment adviser with Apple Financial Services, an affiliate of Apple Federal Credit Union. He defrauded 10 investors out of $1 million. The scheme centered on soliciting largely senior citizens and widows for investments. Mr. Elmas owned a bank account in the name of I.E. Financial Solutions. Over a two year period beginning in 2012, he raised over $1 million from investors. In some instances Mr. Elmas induced investors to deposit their funds with I. E. Financial without telling them that it was actually his bank account. In other instances the bank account was described as an investment vehicle such as a certificate of deposit or a real estate investment trust. Other clients just transferred their funds to I.E. Financial. Regardless of the mechanism used, Mr. Elmas misappropriate the funds. Overall 10 investors were defrauded. He pleaded guilty to one count of wire fraud.

Mr. Elmas is scheduled to be sentenced on January 16, 2015.

Hong Kong

Improper conduct: The Securities and Futures Commission suspended Ho Siu Po, a registered representative of DBS Vickers Ltd., for seven months. The suspension is based on his disregard of firm policies which included operating accounts on a discretionary basis and accepting cash from a client, both of which are prohibited.

MOU: The SFC entered into a memorandum of understanding with the China Securities Regulatory Commission. It calls for cooperation regarding enforcement, the sharing of information and data, establishes a process for joint investigations and ensures that enforcement actions in both jurisdictions operate to protect the investing public.

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