The Securities and Exchange Commission (“SEC”) charged hedge fund manager Douglas F. Whitman and his California based firm, Whitman Capital, LLC, with making $980,000 illegally in connection with an insider trading ring connected to Raj Rajaratnam and hedge fund advisory firm Galleon Management.
The SEC complaint stated that Whitman and his firm illegally traded Polycom, Inc. and Google, Inc. based on tips of material non-public information that Whitman obtained from an individual investor. During 2006 and 2007, the tipper, a one-time associate of Raj Rajaratnam, provided Whitman with material non-public information on Polycom and Google. In January 2006, the tipper, who was Whitman’s neighbor at the time, illegally tipped Whitman with information about Polycom’s quarterly financial results. Whitman Capital accumulated 132,263 shares of Polycom stock, and then after the company announced its results, Whitman Capital liquidated its entire Polycom position for a profit of more than $360,000. The SEC further alleged that the tipper illegally tipped Whitman with inside information about Google’s quarterly financial results before they went public, leading Whitman Capital to purchase 2,761 Google put option positions and generated ill-gotten profits of more than $620,000.
The complaint seeks a final judgment permanently enjoining the defendants from future violations of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties.
The Securities and Exchange Commission (“SEC”) charged four former Credit Suisse employees with violating federal securities laws while engaging in fraudulent over-pricing of subprime bonds. The investment bankers allegedly manipulated the accounting behind the pricing of the group’s investment portfolio. The scheme was originated by a UK investment banker.
The mismarking scheme was triggered by the bankers’ desire to secure large year-end commissions and a coveted promotion to high-level senior positions in Credit Suisse’s investment banking unit. The over-pricing scheme falsified the prices of over $3 billion of subprime bonds owned by Credit Suisse Group.
The complaint alleged that between August 2007 and February 2008, defendants ignored Credit Suisse’s policies, as well as, the U.S. Generally Accepted Accounting Principles (GAAP), to mark securities at fair market value. Instead, defendants arbitrarily manipulated the price of Credit Suisse’s AAA bond portfolio to a deceptive higher market value. The complaint alleged that by August 2007, as the credit markets became more distressed and less liquid, defendants had a paper loss of approximately $75 million. Faced with this loss, the bankers took it upon themselves to fraudulently manipulate the accounting to inflate the portfolio value. The SEC’s investigation focused on recordings of telephone conversations among the defendants.
The SEC did not press charges against Credit Suisse, their decision influenced by the isolated nature of the wrongdoing, and Credit Suisse’s immediate self-reporting and cooperation with the SEC and other law enforcement agencies, as well as prompt public disclosure of corrected financial results. Additionally, Credit Suisse voluntary terminated the four investment bankers and implemented enhanced internal controls to prevent a recurrence of the misconduct.
The Financial Industry Regulatory Authority (“FINRA”) filed a complaint against Charles Schwab & Company for violating FINRA rules when the firm amended its Customer Account Agreements to include (1) a Waiver of Class Action or Representative Action provision, and (2), language requiring customers to waive their right to bring or participate in class actions against Schwab.
According to FINRA’s complaint, Schwab mailed improper contractual amendments to over 6.8 million clients. FINRA alleged that Schwab’s “violative conduct is ongoing”, and that it will “likely lead millions of Schwab customers who have received the account agreements to incorrectly believe they don’t have the ability to bring or participate in class actions.”
FINRA stated that both provisions violate FINRA Rule 2268(d)(1), which prohibits member firms from placing any condition in a pre-dispute arbitration agreement that “limits or contradicts the rules of any self-regulatory organization.” Additionally, FINRA alleges Schwab’s class action waiver is a condition that contradicts the FINRA Code of Arbitration Procedure for Customer Disputes, Rule 12204(d), which addresses how customers can bring and participate in class actions against member firms.
In response, Schwab filed a lawsuit in the U.S. District Court for the Northern District of California in San Francisco, where the company is based, against FINRA. Schwab alleged that it added the waiver provision to all of its customers account agreements in September 2011, following the Supreme Court’s decision in AT&T Mobility LLC vs. Concepcion. In a statement, Schwab declared that it is confident that the court will find FINRA’s action is barred by the Federal Arbitration Act. Moreover, the company says that it is “committed to resolving customer disputes fairly and efficiently without litigation through its internal customer advocacy program or by use of FINRA Dispute Resolution.”