In an arbitration that lasted 12 hearing sessions, a Richmond, Virginia panel awarded damages to former clients who suffered losses in variable annuities issued by John Hancock, Pacific Life, Jackson National Life, Travelers and Allianz. DAW did not represent the Claimants. FINRA Arbitration No. 10-04782.
SEC Charged a Hollywood Movie Producer with Insider Trading
The Securities and Exchange Commission (“SEC”) charged Mohammed Mark Amin, a Hollywood movie producer, and five of his close acquaintances, with insider trading in DuPont Fabros Technology (“DFT”). DFT owns, develops, operates and manages facilities that maintain computer servers for companies such as Yahoo!, Facebook, Microsoft, and Google.
The SEC alleged that Mr. Amin, who served on DFT’s board of directors since 2007, along with two of his relatives and three friends, used material non-public information to purchase and ultimately illegally profit in DFT securities. As a member of the board of directors, Mr. Amin attended a special board meeting on December 22, 2008 and participated in a telephone conference call with DFT’s CEO, on January 7, 2009. During these meetings, Mr. Amin acquired inside information.
According to the SEC’s complaint, after his telephone conference with DFT’s CEO, Mr. Amin tipped his cousin and asked him to purchase $100,000.00 of DFT shares. Between January 8 and February 10, 2009, Mr. Amin and his acquaintances purchased 405,150 shares of DFT shares, generating more than $618,000.00 in illicit profits. On February 11, 2009, DFT released its 2008 earnings report, disclosing the previously non-public information, causing DFT’s stock to increase 36%.
The SEC said, “Mark Amin disregarded his board responsibilities and betrayed shareholders at DuPont Fabros in favor of giving his circle of relatives and friends an inside scoop to trade on nonpublic information.” Mr. Mark Amin resigned from DFT’s board of directors in February 2011. Without admitting or denying the allegations, the Defendants agreed to collectively pay nearly $2 million in disgorgement, interest and penalties.
SEC Charges Paralegal and Her Father in Insider Trading Scheme
The Securities and Exchange Commission (“SEC”) charged Angela Milliard, a former paralegal for Semitool, Inc., with trading on confidential information regarding the acquisition of Semitool by Applied Materials.
According to the SEC, in October 2009 Ms. Milliard learned through her employment at Semitol, of Applied Materials’ tender order to acquire Semitool. The tender offer of $11 per share presented a significant premium above Semitool’s then trading price of $7.83. This information was material and confidential.
The SEC’s complaint alleged that Ms. Miller, in an effort to conceal her trades, wired money to her boyfriend’s brokerage account and used it to secretly buy Semitool stock. Between October 28 and November 16, 2009, Ms. Milliard purchased 5,700 Semitool shares in her and her boyfriend’s brokerage accounts. At the same time, she tipped confidential information about the merger to her father. Her father and other family members purchased 14,800 Semitool shares. On the morning of November 17, 2009, after Applied Materials announced its acquisition, Ms. Milliard, her father and certain family members sold their shares for profits of $68,160.11.
The SEC stated, “Angela Milliard exploited her access to confidential merger and acquisition information to illicitly enrich herself and her family.” And “[a]s a member of a legal department entrusted with sensitive deal documents, she had a duty to safeguard that information, not trade on it.”
Ms. Milliard and her father agreed to settle the SEC’s charges by paying $175,367.01 in disgorgement, interest and penalties.
FINRA Sanctioned Four Brokerage Firms for Unsuitable Leveraged & Inverse ETF Transactions
The Financial Industry Regulatory Authority (“FINRA”) sanctioned Citigroup Global Markets Inc., Morgan Stanley & Co., LLC, UBS Financial Services, and Wells Fargo Advisors, LLC (the “firms”), for improper transactions involving leveraged and inverse exchange-traded funds. FINRA ordered the firms to pay the following: Citigroup, $2 million fine and $146,431.00 in restitution, Morgan Stanley, $1.75 million fine and $604,584 in restitution, UBS, $1.5 million fine and $431,488.00 in restitution, and Wells Fargo, $2.1 million fine and $641,489 in restitution.
According to FINRA, leveraged and inverse ETF’s have particular risks not found in traditional ETF’s. Most of these products “reset” daily, meaning that they are designed to achieve their stated objectives on a daily basis. FINRA’s investigation revealed that each firm sold billions of dollars of these non-traditional EFT’s. The firms exposed investors to risks and unpredictability factors inherent in these products, especially when held over a period longer than a day.
FINRA’s investigation found that from January 2008 through June 2009, the firms did not have adequate supervisory systems to monitor the sales of the products and failed to conduct proper due diligence regarding the risks and features of inverse ETF’s. Furthermore, the firms’ registered representatives made unsuitable recommendations of these products to some customers with conservative investment objectives and/or risk profiles. FINRA said, “[t]he added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers. Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products.”
By accepting the settlement, the firms neither admitted nor denied the charges.
FINRA & SEC Fined Goldman, Sachs $22 Million for Inadequate Policies & Procedures in Research “Huddles”
The Financial Industry Regulatory Authority (“FINRA”) in conjunction with the Securities and Exchange Commission (“SEC”) fined Goldman, Sachs & Co. $22 million for failure to establish adequate policies to prevent the misuse of material, nonpublic information about upcoming changes to its research.
According to the investigation, in 2006 Goldman implemented a formalized business process known as “Trading Huddles.” These were internal weekly meetings attended by equity research analysts, traders, and on occasion, may have included clients, to discuss their top short-term trading ideas. In addition to Trading Huddles, in January 2007, Goldman established a program known as the Asymmetric Service Initiative (ASI) in which analysts shared information and trading ideas from the huddles with Goldman’s high priority clients. ASI clients were typically large hedge funds and other institutional investors. These programs created significant risks that material nonpublic information could be disclosed to ASI clients, prior to its release to the general public. Goldman’s failure to properly supervise these programs gave ASI clients an unfair advantage of trading in advance of research ratings and other changes.
The SEC found that the Trading Huddles and the ASI programs were created to improve the performance of the firm’s traders and generating increased commission revenues from ASI clients. Furthermore, FINRA alleged that Goldman made clear to analysts the importance of the programs to their performance evaluations which would impact their compensation.
The SEC stated, “[f]irms must understand that they cannot develop new programs and services without evaluating their policies and procedures,” and that “Goldman failed to implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients.” Both the Trading Huddles and the ASI programs were discontinued in 2011.
The SEC and FINRA sanctions come 10 months after Massachusetts regulators fined Goldman for the same practice.
FINRA Fines Citi International Financial Services for Excessive Markups and Markdowns
The Financial Industry Regulatory Authority (“FINRA”) fined Citi International Financial Services, LLC, a subsidiary of Citigroup, Inc., for charging excessive markups and markdowns on corporate and agency bond transactions.
FINRA’s investigation concluded that from July 2007 through September 2010, Citi International charged markups or markdowns between 2.73% and 10%, which were excessive given market conditions, the cost of executing the transactions, and the value of the services rendered to its customers, among other factors. FINRA stated “[t]he markups and markdowns charged by Citi International were outside of appropriate standards for fair pricing in debt transactions.” FINRA’s Rules of Fair Practice established 5% as a reasonable guideline in markups and markdowns. FINRA fined Citi International $600,000, and ordered it to pay more than $648,000 in restitution and interest to its customers. According to FINRA, the firm’s supervisory procedures in reference to fixed income transactions had significant deficiencies.
By accepting the settlement, Citi International neither admitted nor denied the charges.
The SEC Charges a Firm with Running a Fraudulent Stock-Collateralized Loan Business
The Securities and Exchange Commission (“SEC”) charged SW Argyll Investments, LLC (“Argyll”) and two of its senior executives for allegedly operating an illegal stock-based lending service scam. The complaint alleged that Argyll, through its agents, deceived borrowers into pledging publicly traded stock, at a discount, promising the return of the securities at the end of the loan term. Instead, the collateralized securities were sold within days to fund the loans.
The complaint alleged that since 2009, on at least 9 different occasions, Argyll scammed affiliates to stock-collateralized loans, under false promises that the shares would be returned to borrowers upon repayment of the loans. The purported business began with the issuance of a “Loan Offer,” the SEC alleged. Upon the victim’s acceptance of a Loan Offer, the victims received a “Loan Package” containing a “Loan Agreement,” a “Pledge Agreement,” a “Promissory Note,” and other documents. The Loan Package did not permit Argyll to sell the collateral except in the event of default.
The SEC stated that Argyll’s senior executives “thought they had devised a foolproof way to make substantial risk-free profits, but their purported business model was nothing more than an illegal get-rich-quick scheme.” Since the loans were generally valued at only 30% to 50% of the pledged stock’s market value, plus interest, Argyll received more than $8 million in unlawful gains.
SEC Charges Mortgage Executives with Fraudulent Misrepresentations and Omissions
The Securities and Exchange Commission (“SEC”) charged three mortgage executives at Thornburg Mortgage, Inc. (“Thornburg”), formerly the nation’s second largest independent mortgage company after Countrywide Financial Corporation. According to the SEC, the executives made fraudulent misrepresentations and omissions about Thornburg’s financial condition, margin call activity and liquidity.
In August 2007, Thornburg was late in meeting margin calls from at least three lenders, thereby placing it at risk of being declared in default of its lending agreements. Subsequently, Defendants allegedly misrepresented to Thornburg’s auditor that the firm had not experienced any non-compliance issues with its contractual obligations. By concealing its margin crisis and making arrangements to make late payments on the defaulted margin calls, the executives mislead its auditor and the investing public. On February 28, 2008, just a few hours after making the final late payment on its margin calls, Thornburg timely filed its annual report. By filing timely, Thornburg avoided disclosing additional margin calls. The annual report overstated the company’s income by more than $400 million, and falsely recorded a profit rather than an actual loss for the fourth quarter. The executives’ intention was “to keep the current situation quiet while we deal with it.”
Thornburg eventually disclosed its problems to the SEC, and on March 11, 2008, filed an amended annual report. By this time, Thornburg’s stock price had collapsed by more than 90 percent. Thornburg filed for bankruptcy on May 1, 2009.
SEC Charges Former Executive at Coca-Cola Enterprises, Inc. with Insider Trading
The Securities and Exchange Commission (“SEC”) charged Coca-Cola Enterprises’s (“CCE”) former Vice President with insider trading. The SEC complaint alleges that the Defendant had access to sensitive non-public information, including CCE’s proposed acquisition of The Coca-Cola Company’s Norwegian and Swedish bottling operations.
In the complaint, The Coca-Cola Company (“CCC”) is defined as a licensor, marketer, producer and distributor of various non-alcoholic beverage brands. CCE is described as a marketer, producer, and distributor of CCC beverage products.
The SEC alleged that in early January 2010, the Defendant learned that CCE was considering the acquisition of CCC’s Norwegian and Swedish bottling operations. Pursuant to CCE’s internal policies, on January 8, 2010 Defendant signed a Non-Disclosure Agreement that required him to maintain the confidentiality of any non-public information he learned about the transaction. Additionally, the complaint states, that on February 16, 2010, CCE’s legal counsel sent an email to Defendant advising him that he was subject to a black-out period relating to the transaction at issue.
The complaint goes on to state that on February 18, 2010, Defendant was part of an internal CCE meeting, categorized as “Strictly Private & Confidential,” which discussed the status of the transaction, including the significant positive growth opportunities for CCE, as well as the fact that the transaction was internally valued at over $800 million. On February 24, 2010, Defendant allegedly purchased 15,000 shares of CCE stock at $19.30 per share, in his wife’s TD Ameritrade brokerage account. The next day, Defendant’s CCE position was allegedly sold at approximately $25.09 per share, enabling the Defendant to make an illicit $86,850 profit.
On September 16, 2010, Defendant was terminated by CCE in connection with his trades. The SEC charged Defendant with violations of Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder.
SEC Charges California Hedge Fund Manager Linked to Galleon Insider Trading Case
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.