SEC Enforcement

Canadian Trader Must Pay Over $1M For Short Selling Violations

Published on: June 10, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Andrew L. Evans, a trader living in Canada, has consented to pay over $1 million to resolve charges that he shorted U.S. stocks in companies planning follow-on offerings and then illegally purchased shares in the offerings to generate substantial profits at little to no risk. The Securities and Exchange Commission said that through his firm Maritime Asset Management, Evans violated Rule 105, federal securities laws’ anti-manipulation provision, multiple times.

Under Rule 105, short selling in an equity security is not allowed during the restricted period, which is typically five days leading up to a public offering, nor is buying the security via the offering. By buying the shares at a lower price in the follow-on offerings that could cover his sort sales, Evans allegedly made over $580K in illegal profits.

The SEC said that the short selling violations happened between 12/10 and 5/12. Under the settlement, Evans must pay over $582K in disgorgement, more than $63K in prejudgment interest and a penalty of more than $364K. A court must still approve the settlement.

SEC’s Use of In-House Judge in Insider Trading Case is Likely Unconstitutional, Rules Federal Judge

Published on: June 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A federal judge has ruled that the decision by the Securities and Exchange Commission to have an in-house judge in an insider trading case was “likely unconstitutional.” In the wake of his decision, U.S. District Judge Leigh Martin May agreed to put a temporary stop to the regulator’s administrative case against Charles Hill unless the case is presided over by a judge who fulfills the requirement for constitutional appointment. The hearing in the insider trading case against Hill was scheduled to begin next week.

Hill, a self-employed Atlanta real estate developer, disputes the regulator’s allegations that he made illicit gains of $744K from trading on a tip a friend purportedly provided about the takeover of Radiant Systems Incorporated. The company was about to be acquired by NCR Corp. for $1.2 billion in 2011.

Hill filed his own lawsuit against the SEC, challenging its decision to have in-house administrative law judge James Grimes preside over his case. Grimes was retained through the SEC’s office of in-house judges instead of having the appointment approved by the regulator’s commissioners. Now Judge May is saying, per Hill’s argument, that the Commission may have broken constitutional protections.

SEC Files Insider Trading Charges Involving Secondary Stock Offerings

Published on: June 3, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is filing insider trading charges against four persons accused of stealing confidential data from investment banks and public company clients so they could trade prior to secondary stock offerings. The four of them allegedly made over $4.4 million in illegal trading profits. Some 15 stocks were reportedly involved. The insider trading scam purportedly went on for three years, from 6/10 to 7/13.

According to the regulator, Steven Fishoff, a former day trader, conspired with his brother-in-law Steven Costantin and friends Ronald Chernin and Paul Petrello. The four of them pretended to be portfolio managers and they allegedly persuaded investment bankers to share confidential information about secondary offerings that were going to take place. Essentially, after agreeing not to tell anyone about the offering or trade in the securities, the defendants were made privy to private data.

The defendants allegedly broke their promises not to tell others about the information, tipping one another with their insider knowledge so they could lower the issuer’s stock price. They would short the stock before the offering was made public. This allowed them to earn short sale profits after the stock price had plunged.

Merrill Lynch to Settle Short-Selling Case for $11M, Admits to Wrongdoing

Published on: June 2, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The SEC said that Merrill Lynch (MER) would pay $11 million to resolve allegations of short-selling-related noncompliance. The regulator said that the wirehouse executed short sales in certain securities when the supply for this type of transaction was restricted.

Customers frequently ask brokerage firms to “locate” stock that can be used for short selling. The financial firms generate easy-to-borrow lists made up of the stock they believe is accessible for such locates. However, contends the SEC, from January 2008 through January 2014 Merrill used information that was dated to create these ETB lists.

For example, there were times when certain securities that were placed on the ETB list in the morning were no longer as easily available for borrowing later in the trading day. Yet Merrill’s platforms were set up so that they continued to process short sale orders according to the now-dated list—even as firm personnel appropriately stopped using the list for sourcing locates when certain shares’ availability had become restricted.

Sage Advisory Group Must Pay Over $1M for Two Securities Fraud Cases

Published on: June 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The United States District Court for the District of Massachusetts has ordered Sage Advisory Group and principal Benjamin Lee Grant (“Lee Grant”) to pay over $1M for two SEC fraud cases. The ruling comes after a federal jury found both of them liable.

In the first case, the regulator is accusing Lee Grant of using allegedly false and misleading statements to fraudulently persuade brokerage customers to move their assets to Sage, which was the firm he was starting in 2005. He purportedly told clients that the 2% wrap fee they would have to pay Sage for transaction, management, and advisory services would not cost as much in the long run as the 1% fee and trading commissions that his former employer, brokerage firm Wedbush Morgan Securities, charged them.

The SEC said that Lee Grant claimed it was First Wilshire Securities Management Inc. that was recommending that clients move their assets to Sage with him. Wilshire Securities Management was the investment adviser managing the assets of these clients at Wedbush. The regulator contends, however, that First Wilshire Securities never made such a recommendation.
Continue Reading ›

Ex-Trident Partners Compliance Director Faces SEC Charges for Allegedly Defrauding Investors And Stealing Broker-Dealer Assets

Published on: May 29, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission’s Enforcement Division has filed fraud charges against William Quigley, the former compliance director of Trident Partners Ltd. According to the regulator, Quigley solicited investors to purchase stock in start-ups that were supposedly about to go public, as well as well-known companies, but never actually bought the investments. Instead, he put their money in brokerage and bank accounts in the Philippines or used ATM machines to take out the funds.

Quigley is accused of working with two brothers in the Philippines. He and his co-conspirators allegedly transferred over $500,000 of investor funds to the accounts in that country.

The SEC claims that Quigley set up three brokerage accounts, including a secret account at Trident Partners, to conduct the scam. As compliance director, he was supposed to open and correctly route incoming correspondence and wires and report suspect transfers. Instead, he stole commission checks written to the brokerage firm and put the money in outside accounts.

Massachusetts Securities Regulator Sues the SEC Over New Rules Affecting Small Company Stock Offerings

Published on: May 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

William Galvin, the securities regulator of Massachusetts, is suing the U.S. Securities and Exchange Commission. Galvin is seeking to stop new rules that he believes restricts state oversight of stock offerings made by emerging and small companies.

With the newly adopted rules, offerings starting at $20 million would only need to be filed with the SEC and not the states. With smaller deals, companies can opt for state-level assessment-or not, and contend with stricter disclosure requirements.

State regulators have long felt that the new rules pre-empt their oversight of a market at which they are the ones who can do the best job at overseeing. These SEC rules are not specific about who or what would qualify as the kind of investor that could buy these offerings. Because no salary restrictions or net worth is imposed, local businesses could easily target retail investors.

Deutsche Bank Ordered to Pay $55M for Misstating Financial Reports During the Economic Crisis

Published on: May 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission is ordering Deutsche Bank AG (DB) to pay $55M to resolve charges accusing the firm of misstating financial reports during the peak of economic crisis. The regulator believes that the financial institution did not factor the material risk for possible losses of billions of dollars.

According to the regulator, in its order instituting a resolved administrative proceeding, Deutsche Bank overvalued a derivatives portfolio the bank had used to buy protection against losses involving credit default. Due to the to the Leveraged Super Senior trades’ “leveraged” nature the collateral for the positions was minimal compared to the $98 billion in purchased protections.

This generated a “gap risk” that the protection’s market value could potentially go beyond the available collateral. Also, because the sellers that put down the collateral could choose to unwind the trade instead of putting more collateral down in such a situation, this meant that technically the bank was protected only up to its collateral level and not its credit protection’s full market value.

Nationwide to Pay $8M Over Variable Annuity Pricing Violations

Published on: May 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Nationwide Life Insurance Co. has ben ordered to pay an $8 million penalty to the U.S. Securities and Exchange Commission for purposely delaying variable annuity and life insurance policy orders and that this led to company’s failure to price these orders in a timely manner.

From 1995 to 2011 clients placed thousands of orders to Nationwide for variable insurance contracts and underlying mutual funds through First Class mail at an Ohio post office box. However, even though the majority of the mail was ready for Nationwide to pick up early in the morning, the company’s couriers were purportedly told to not collect the mail until after 4pm.

The SEC said that this violates the Investment Company Act of 1940’s Rule 22c-1, which mandates that a company price orders made prior to 4p at that day’s price while orders after 4 pm are to be priced at the next day’s price. The insurer is accused of going to the post office and stressing the need for variable contract mail to be delivered late. Certain couriers even purposely delayed when they’d arrive at the carrier’s home office by stopping to purchase food or get gas. Meantime, said the SEC, Nationwide managed to pick up and deliver mail for other its business units without such delays.

Gray Financial is Charged with Bilking Georgia Pension Funds

Published on: May 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is accusing investment advisory firm Gray Financial, its co-CEO Robert C. Hubbard IV, and president/founder Laurence O. Gray with fraud. The regulator claims that the three of them of breached their duty to clients by directing certain pension funds to invest in a firm-offered alternative investment even while knowing that the investments were not in compliance with Georgia law.

The SEC’s order said that Gray Financial made the inappropriate recommendations to Atlanta’s:

• Firefighters’ Pension Fund