by T. GormanPosted on Posted in SECActions

Analysts reports frequently move the market and are thus considered inside information prior to publication. That is the predicate for an SEC administrative proceeding which charges a Wells Fargo analyst and trader with insider trading. In the Matter of George T. Bolan, Jr., Adm. Proc. File No. 3-16178 (September 29, 2014).

George Bolan was a research analyst in the Wells Fargo research department in Nashville, Tennessee. He was also a registered representative. His research focused on the health care industry: contract research organizations, health care information technology and life science tools.

Respondent Joseph Ruggieri was a senior trader of health care stocks in Wells Fargo’s trading department in New York from August 2009 to April 2011. He was also a registered representative, executing customer transactions and placing principal trades on behalf of Wells Fargo. He was paid 6% of the monthly net profit and loss in his firm trading account. He also received a salary and 5% of the commissions he generated on a monthly basis.

Messrs. Bolan and Ruggieri are friends. At one point Mr. Ruggieri and his manager at Wells Fargo provided positive feedback to Mr. Bolan’s managers at the firm which helped him obtain a promotion.

Mr. Bolan was a well-respected analyst in the areas he covered. Institutional Investor publications named him “Best up and Comer” in 2010. The department viewed him as a rising star. He also understood that the impact of his ratings and that they moved markets. In an e-mail exchange between the two men Mr. Ruggieri noted in referencing one of Mr. Bolan’s research notes that “’[s]till moving stock.”

Between April 2010 and March 2011 Mr. Bohan published eight ratings changes or initiations of coverage with an outperform or underperform rating. Mr. Ruggieri traded in advance of six of them, according to the Order. In each instance the Order alleges that the Mr. Bohan after completing his assessment of the firm, and before the publication of the report, “communicated, in words or substance, material nonpublic information . . .” to Mr. Ruggieri. In some instances the Order alleges that after Mr. Bohan’s supervisor signed off on the report there was a phone call between the two men. In each instance Mr. Ruggieri traded in advance of the public distribution of the report.

Following the publication of the six reports the volume and/or the stock price increased or decreased, depending on the rating. Overall Mr. Ruggieri had over $117,00 in trading profits. Mr. Bolan is alleged to have benefited from the illegal tipping because of the friendship between the two men and from the recommendation that assisted him in obtaining a promotion.

The Order also alleges that Mr. Bolan tipped Trader A in one instance in May 2010 who traded profitably. Trader A was a friend of Mr. Bolan’s who has since passed away.

Wells Fargo compliance procedures prohibited analysts from furnishing information about their reports to others prior to publication. Traders were also precluded from using such information. Both Mr. Bohan and Mr. Rugieri attended compliance meetings where power points were used to establish these points. Firm policy also precluded trading on inside information.

The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The proceeding will be set for hearing.

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by T. GormanPosted on Posted in SECActions

Investment fund fraud actions – those in which investors are convinced to part with their hard earned cash on the promise of good, often guaranteed but illusory returns — have become a staple of SEC enforcement. Sometimes the scheme is an offering fraud. In other instances the scheme is more complex. Regardless of the structure, the end is always the same. Investors who thought they were maximizing their returns end up with little or nothing. Those running the scheme make off with the cash.

Last week the Commission brought two investment fund fraud actions. One was filed on Monday and announced on Tuesday. SEC v. Zhunrize, Civil Action No. 1:14-cv-0303 (N.D. Ga. Filed September 22, 2014). See Lit. Re. No. 32091 (Sept. 23, 2014). A second was brought on Wednesday. SEC v. eAGear, Inc. Civil Action No. 14-cv-04294 (N.D. Cal. Filed September 24, 2014). Both cases were packaged together into a press release issued on Friday, apparently as another example of “broken windows.”

Zhunrize is discussed here. In eAdGear the defendants are eAdGear, an internet company; eAdGgear Holdins Ltd.; Charles S. Wang; Francis Yuen; and Qian Cathy Zhang. Mr. Wang is the founder and CEO of eAdGear Holdings, Mr. Yuen is the founder and CFO and COO of eAdGear Holdings and eAdGear; Ms. Zhang is a defacto officer of both companies.

eAdGear is represented to be a successful internet marketing and advertising company. The firm supposedly increases page rankings for customer websites on search engines.

Investors have the opportunity to profit in two ways. First, each investor account is credited daily with a share of the revenues generated from the collective efforts of the members. Second, investors are credited with a portion of the money generated from the referral of new investors who purchase a package for a fee. Investors are told that they have the potential for very significant returns.

The defendants have sold investors about $129 million in so-called memberships or business packages in eAdGear.com over the last four years. About 66,000 accounts for largely Chinese investors in the U.S. and abroad have been established.

Although eAdGear claims to generate millions of dollars in revenues from its internet marketing business, in fact it has no such business, according to the complaint. Rather, the records of the firm demonstrate that there is no search engine optimization business. Revenue was generated from the sale of memberships and then misappropriated by the defendants.

eAdGear is tottering on the brink of collapse. While the firm has about $370,000 in bank accounts, it owes investors at least $5 million. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and liability under Exchange Act Section 20(a). The case is pending.

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