by T. GormanPosted on Posted in SECActions

The acquisition of Burger King by 3G Capital Partners is the matter that just keeps on giving – at least for SEC enforcement. Initially, the Commission brought an action against Wells Fargo broker Waldyr Da Silva Prado Neto, who misappropriated inside information about the transaction from a client, tipped others who traded and traded for his own account. SEC v. Prado, Civil Action No. 12-CIV-7094 (S.D.N.Y. Sept. 20, 2012); see also U.S. v. Prado, Case No. 13-mg-2201 (S.D.N.Y. Sept. 13, 2013). Then the Commission brought an action against Wells Fargo for failing to establish and enforce procedures to prevent the misuse of material, non-public information. In the Matter of Wells Fargo Advisors, LLC., Adm. Proc. File No. 3-16153 (Sept. 22, 2014). Now the Commission has instituted an administrative proceeding against a former Wells Fargo compliance officer for altering a record produced to the staff in connection with its investigation of the broker. In the Matter of Judy K. Wolf, Adm. Proc. File No. 3-016195 (October 15, 2014).

Ms. Wolf was a compliance consultant for Wells Fargo Advisors prior to her termination in June 2013. In 2009 she drafted the firm’s policies and procedures governing how “look back” reviews would be conducted. Ms. Wolf was the sole compliance officer conducting these reviews. Most of her reviews closed with “no findings.” A log of those inquiries was maintained, although it did not specify the reason for terminating the inquiry.

On September 2, 2010, the day the Burger King deal was announced, Ms. Wolf began a look back review of the trading surrounding the deal. She concluded that: 1) Mr. Prado and his customers represented the top four positions in Burger King securities firm-wide; 2) Mr. Prado and his customers purchased Burger King stock within 10 days of the announcement; 3) Mr. Prado and his customers each had profits that exceeded the $5,0000 threshold specified in the look back review procedures; 4) Mr. Prado and Burger King were located in Miami; and 5) Mr. Prado, his customers and the acquiring company were all Brazilian. News articles about the event were not printed and included in the file despite a provision in the procedures requiring this step. The review was closed and therefore not forwarded to the branch manager. Supervisors at Wells Fargo did not learn about the review until two years later when the SEC filed its insider trading action against Mr. Prado.

In July 2012 the Commission requested as part of its on-going investigation, that Wells Fargo produce its compliance files relating to Mr. Prado. Although the production was eventually certified as complete, it did not include Ms. Wolf’s file. When a second request was made in January 2013, that file was included in the production. Ms. Wolf’s log stated “09/02/10 opened 24% higher@$23.35 vs. previous close of $18.86. Rumors of acquisition by a private equity group had been circulating for several weeks prior to the announcement. The stock price was up 15% on 9/1/12 [sic], the day prior to the announcement.”

Ms. Wolf provided contradictory testimony during the investigation. Initially, she testified that the file had not been altered. She claimed that the date of 9/1/12 in the sentence quoted above was a typo. In addition, Ms. Wolf stated that the news articles were a primary reason for closing the file. Later Wells Fargo produced documents indicating that the Burger King log entry had been altered on December 28, 2012. A prior version of the log was produced that did not contain the sentence quoted above along with the metadata.

Following her termination from Wells Fargo the Commission took Ms. Wolf’s testimony a second time. During the testimony she admitted altering the log.

The Order alleges violations of Exchange Act Section 17(a) and the related rules. The proceeding will be set for hearing.

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by T. GormanPosted on Posted in SECActions

The second time around proved to be the undoing of a senior financial analyst at a pharmaceutical company identified only as Pharma Co. Two years ago he supposedly furnished material non-public information about a proposed take-over to his longtime friend, identified as Trader. Trader traded and profited. No action was brought. In 2014 the analyst supposedly furnished the same friend inside information on another transaction. This time the SEC and the Manhattan U.S. Attorney filed civil and criminal charges against the analyst. SEC v. Zwerko, Civil Action No. CV 8181 (S.D.N.Y. Filed Oct. 10, 2014).

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 Trader who was a 2008 classmate at business school. Since that time the two have maintained a social relationship.

Trader traded in advance of the June 9, 2014 pre-market announcement that Pharma Co. had agreed to acquire Idenix Pharmaceuticals, Inc. whose shares were listed on the NASDAQ stock market. The transaction 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 transactions. 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 and 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 modelling 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.

On the same day he received the e-mail from his supervisor, Mr. Zwerko sent a text to Trader. Later that evening, the two friends spoke on the phone. Two minutes after the call ended Trader placed an order for 1,000 shares of Idenix. Although it was not executed, starting the next day Trader purchased shares, investing over $219,000.

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

  • 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 Trader; and
  • On June 4, 5 and 6 Trader purchased additional shares.

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

In 2012 Mr. Zwerko is alleged to have tipped his friend Trader in advance of 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 Trader 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 Trader’s cell phone. The next day Trader 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.

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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