by T. GormanPosted on Posted in SECActions

Wells Fargo was named by the Commission in a proceeding for failing to establish, maintain and enforce policies and procedures to prevent the misuse of inside information. The firm added to its difficulties during the investigation by failing to timely produce records regarding an instance of insider trading by one of its representatives and producing an altered document. In the Matter of Wells Fargo Advisors, LLC, Adm. Proc. File No. 3-16153 (September 22, 2014).

Wells Fargo Advisors is a registered broker-dealer and investment adviser. In 2012 one of its registered representatives, Silva Prado Neto, was charged by the Commission in an insider trading action. SEC v. Prado, Civil Action No. 12-CIV 7094 (2012). The action alleged that in September 2012 Mr. Prado traded in the securities of Burger King in advance of the September 2, 2010 announcement that 3G Capital Partners Ltd., a private equity firm, would acquire the company and take it private. At the time of the trades Mr. Prado had inside information about the acquisition from one of his brokerage customers who invested in 3G Capital. The trades were placed through Mr. Prado’s personal brokerage account at Wells Fargo. He also tipped several of his other brokerage customers. The action claimed that Mr. Prado and those he tipped obtained over $2 million is illegal profits. The case concluded with the entry by default of a permanent injunction prohibiting Mr. Prado from committing future violations.

After the filing of the action, Wells Fargo conducted a review. The reviewer determined that: 1) Mr, Prado and his customers represented the top four positions in Burger King securities firm-wide; 2) Mr. Prado and his customers bought Burger King securities within 10 days before the announcement of the deal; 3) the profits by Mr. Prado and his customers were at least $5,000; 4) Mr. Prado and Burger King were both located in Miami; and 5) Mr. Prado, his customers and the company acquiring Burger King were all Brazilian. The inquiry was closed without contacting the branch manager.

Other compliance units at Wells Fargo had information regarding the insider trading incident. For example, the AML unit examined a $50 million wire transfer request by Mr. Prado’s customer to make his private equity investment in the Burger King acquisition. During the review Mr. Prado provided the unit with copies of the offering documents dated before the public announcement regarding the investment by the customer. The AML unit did not question how Mr. Prado obtained the offering documents or consider if he or his customers possessed or misused material nonpublic information.

In another supervisory unit, two different supervisors separately reviewed concentrations in the accounts of Mr. Prado’s customers. One reviewer examined an account in which 47% of the holdings were Berger King securities. Another reviewer examined an account in which 45% of the securities were Berger King. No action was taken.

When the Commission’s inquiry began a request was made for all of the documents of reviews related to Mr. Prado. Initially, the documents relating to the review by the compliance official were not produced. Six months later after another request the documents were produced. Later the staff learned that one document had been alter by adding the statement that “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, the day prior to the announcement.”

The Order finds that Wells Fargo had inadequate policies and procedures to prevent the misuse of inside information. Although a review was conducted after the trading by Mr. Prada, the information was not shared with senior managers or other compliance groups that were aware of issues relating to the trading. The policies and procedures of the firm gave virtually sole authority to conduct the compliance review to one unit but did not provide for any coordination of information that other units had relating to the subject of the review. In addition, the firm inconsistently enforced its policies.

The Order alleges willful violations of Exchange Act Section 15(g), 17(a) and (b) and of Advisers Act Section 204A and 204(a).

To resolve the proceeding Wells Fargo agreed to implement a series of of undertakings. Those included the retention of an independent consultant who will compile a report and make recommendations which will be adopted. The firm also admitted to the facts set forth in the Order and acknowledged that its conduct violated the federal securities laws. Wells Fargo consented to the entry of a cease and desist order based on the Sections cited in the Order, to a censure and to pay a $5 million penalty.

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by T. GormanPosted on Posted in SECActions

Separating the source of the inside information from the trader with a buffer was supposed to shield everyone from the watchful eye of enforcement officials. If there were questions, research reports would be produced to support the purchase. This was the theory of three friends who used inside information stolen from Simpson Thacher & Bartlett LLP. The scheme was profitable, garnering over $5.6 million in illicit insider trading profits. Ultimately the concealment scheme was not. Each one of the men has now been charged with insider trading by the SEC and the U.S. Attorney’s Office.

Frank Tamayo was the man in the middle. Currently employed as a mortgage broker, he has been friends with Steven Metro since both attended law school years ago. He has also been friends with Vladimir Eydelman for years. Mr. Metro is a law school graduate who at one time worked for Simpson Thatcher as a managing clerk. Through that position he had access to inside information on deals in which the law firm was involved. Mr. Eydelman was a registered representative with Oppenheimer & Co. and before that with Morgan Stanley.

The scheme traces to February 2009 at a New York City bar. Messrs. Tamayo and Metro met with friends for drinks but separated and discussed stocks. One was Mr. Tamayo’s holdings in Sirius XM Radio. Mr. Tamayo expressed concern that the firm would go bankrupt. Mr. Metro assured his friend that it would not because Liberty Media Corporation planned to invest over $500 million in the company. He knew this from reviewing Simpson Thatcher documents he assured his friend.

Subsequently, the two men called broker Eydelman and ordered additional Sirius shares for Mr. Tamayo’s account. When the broker expressed concern about the financial condition of Sirius he was reassured by his client that information from a reliable source said Liberty would invest $500 million in the company. 300,000 shares were purchased. A friend of Mr. Tamayo also purchased shares. When the Liberty-Sirius deal was announced on February 17, 2009 Mr. Tamayo had potential profits of about $157,892. His friend had profits of about $54,922. When Mr. Tamayo offered $7,000 to his friend as a “thank you” he was told to keep it in his account.

From this beginning a scheme unfolded in which the men traded on inside information stolen from Simpson Thatcher thirteen times. The mechanics of the scheme were designed to shield the three from capture:

  • Mr. Metro accessed the law firm’s non-public information through the computer system to identify possible corporate transactions. Once the information was obtained he would ask Mr. Tamayo to meet in person.
  • Messrs. Metro and Tamayo typically met at a New York City coffee shop. Mr. Metro would show his friend his cell phone screen on which he displayed the names and/or ticker symbols of the two companies involved and then point to the name of the acquirer. The approximate price and the announcement date were also conveyed.
  • Messrs. Eydelman and Tamayo would meet later near the information booth in Grand Central Station. There Mr. Tamayo would walk up to the broker, show him a post-it or napkin with the name of the company written on it and then either chew the paper up or eat it.
  • Mr. Eydelman then returned to his office and researched the company. Reports with a recommendation would be transmitted to Mr. Tamayo. The stock would be purchased.

Since the source of the information did not directly contact the broker – Mr. Tamayo was the buffer – the three were not supposed to be apprehended, and if there were questions research was available to substantiate the reasons for the trade, according to the theory. Yet previously Messrs. Eydelman and Metro were named as defendants in an insider trading case by the SEC and charged with criminal securities fraud by the U.S. Attorney’s Office for New Jersey. SEC v. Eydelman (D.N.J. Filed March 19, 2014). Now the SEC and the New Jersey U.S. Attorney’s Office have charged Mr. Tamayo with insider trading. SEC v. Tamayon (D. N. J. Filed September 19, 2014). The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e) and Securities Act Section 17(a). The case is pending.

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