Category Archives: SEC News

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.

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.

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 Securities and Exchange Commission (“SEC”) alleged that the brothers engaged in illegal naked short-sales after failing to locate and deliver shares involved in short-sales to broker-dealers.  The SEC stated that “[b]y engaging in naked short selling, [Respondents] had a major advantage over competitors who complied with the law and incurred the costs associated with actually borrowing securities.”

Short selling is a legal, advanced trading strategy.  The SEC rules require short sellers to locate shares to borrow before selling them short, and they must deliver the borrowed securities by a specific date. Naked short-selling occurs when the transaction is performed without having borrowed the securities to make delivery.

According to the SEC’s order, from July 2006 to July 2007, Respondents engaged in various types of intricate investment transactions to accomplish their scam.  Respondents were able to engage in “naked” short sales by routinely engaging in combinations of “reverse conversion,” “reset”, and “assist” transactions.  Respondents generated more than $17 million in ill-gotten gains from the transactions involving stocks including Chipotle Mexican Grill, Inc., Fairfax Financial Holdings Ltd., Novastar Financial Inc., and NYSE Group.  Per his own admission, one Respondent stated in a recorded telephone call “[w]hat I sell them is not guaranteed, it never gets delivered, its funny paper.”

The SEC alleged that Respondents violated the locate and close-out requirements of Regulation SHO of the Securities Exchange Act of 1934.

The Securities and Exchange Commission (“SEC”) charged Igors Nagaicevs, a 34 year old Latvian citizen, with conducting a widespread online account intrusion scheme in which he manipulated the prices of more than 100 NYSE and Nasdaq securities, and caused more than $2 million in harm to U.S. investors.

According to the SEC complaint, between June 2009 and August 2010, Nagaicevs hijacked online accounts and made unauthorized purchases and sales of securities.  By doing this, Nagaicevs manipulated the prices of stocks in which he already held positions, and was thereby later able to sell at a profit.  The entire pattern was always completed within the same trading day, often within minutes.  Nagaicevs engaged in this pattern on at least 159 occasions, generating more than $850,000.00 in illegal profits.  The unauthorized activity caused losses in excess of $2 million, which were reimbursed by the broker-dealer firms that carried the hijacked accounts.

Simultaneously, the SEC initiated administrative actions against the four electronic trading firms that allowed Nagaicevs to trade through their platforms without registering him as broker.  The SEC stated, “[t]hese firms provided unfettered access to trade in the U.S. securities markets on an essentially anonymous basis.”  The trading firms named in the SEC’s administrative actions relating to this scam are:  (1) Alchemy Ventures, Inc. of San Mateo, California; (2) KM Capital Management, LLC of Philadelphia; (3) Zanshin Enterprises, LLC of Boise, Idaho; and (4) Mercury Capital of La Jolla, California.  The SEC’s administrative action will determine whether the non-settling trading firms and principals violated the broker registration provisions of the federal securities laws.

The Securities and Exchange Commission (“SEC”) charged First Resource Group, LLC, a Fort Lauderdale, Florida based firm, and its founder, David H. Stern, with conducting a fraudulent boiler room scheme in which they hyped stocks in two thinly traded companies, while behind the scenes they allegedly sold the same stock themselves for illegal profits.

The SEC charged that from December 2008 to May 2010, First Resource signed contracts with two promoters to solicit investors to buy stock of TrinityCare Senior Living, Inc. and Cytta Corporation.  In return, First Resource received shares of each company’s stock as compensation for soliciting investors.  Stern and First Resource used telemarketers to contact investors.  While the First Resource telemarketers were recommending that investors purchase TrinityCare and Cytta stock, Stern was selling the shares he received as compensation.  Stern also allegedly manipulated the markets for the two stocks, purchasing small amounts of each stock at prices above the market to raise the market price and create the false appearance of legitimate trading activity.  Furthermore, First Resource and Stern allegedly acted as unregistered broker-dealers.  The SEC’s complaint alleged that First Resource Group and Stern violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities and Exchange Act of 1934 and Rule 10b-5.

On January 18, 2012, the Securities and Exchange Commission (SEC) charged two multi-billion dollar hedge fund advisory firms as well as seven fund managers and analysts involved in a $78 million insider trading scheme based on nonpublic information about Dell’s quarterly earnings.

Insider-trading is an illegal activity when a corporation’s stock or other securities are traded by individuals with special knowledge or access to non-public information about the company, giving them an unfair advantage over regular investors.  The SEC states that this case involves insider trading by members of a network closely associated hedge fund trades who illegally obtained material nonpublic information concerning public companies Dell, Inc and/or Nvidia Corporation, exchanged that information with others, and reaped massive profits from trading on that information.

Manhattan U.S Attorney, Preet Bharara, described the group of individuals involved as “a circle of friends who essentially formed a criminal club, whose purpose was profit and whose members regularly bartered lucrative inside information. It was a club where everyone scratched everyone else’s back.”  The Director of the SEC’s Division of Enforcement said in a statement that “These are not low-level employees succumbing to temptation by seizing a chance opportunity. These are sophisticated players who built a corrupt network to systematically and methodically obtain and exploit illegal inside information again and again at the expense of law-abiding investors and the integrity of the markets.”

The SEC alleges that during at least 2008, investment analyst Sandeep “Sandy” Goyal illegally obtained Dell quarterly earnings information and other performance data from an insider at Dell.  Goyal then tipped Diamondback Capital Management, LLC analyst Jesse Tortora with the inside information in advance of Dell’s first and second quarter earnings announcements in 2008, Tortora then tipped his portfolio manager at Diamondback, Todd Newman, then he traded on the information on behalf of the Diamondback hedge funds he controlled.  Tortora also tipped Spyridon “Sam” Adondakis, an analyst at Level Global Investors, L.P.  Adondakis tipped his manager Anthony Chiasson, who then traded on the inside information on behalf of Level Global hedge funds.  According to the SEC’s complaint, Tortora also tipped two others at firms other than Diamondback or Level Global with the Dell inside information: Jon Horvath of New York City and Danny Kuo of San Marino, Calif.  The SEC complaint further alleges that in addition to engaging in insider trading in Dell securities, at least five of the seven individual defendants and both investment adviser firm defendants obtained material nonpublic information concerning Nvidia, and traded on the basis of that information and/or passed the information on to other who traded.

The SEC’s investigation and complaint filed in federal court in Manhattan is part of an ongoing four-year old insider-trading probe named “Operation Perfect Hedge”, which so far has resulted in 63 arrests and 56 convictions.

The Securities and Exchange Commission (SEC) charged an investment advisory arm of UBS with failing to properly price securities in three mutual funds that it managed.  In the complaint, the Commission states that this proceeding concerns the misstatement of the Net Asset Values (“NAV’s”) of certain registered investment companies (the “Funds”) managed by UBSGAM. UBSGAM failed to cause certain fixed-income securities in the portfolios of the Funds to be valued in accordance with the Funds’ fair valuation procedures. UBSGAM’s failure to properly fair value these securities resulted in a misstatement of the NAVs of the Funds.

Netassetvalue (NAV) represents a fund’s per share marketvalue. This is the price at which investors buy (“bid price”) fund shares from a fund company and sell them (“redemption price”) to a fund company. It is derived by dividing the total value of all the cash and securities in a fund’s portfolio, less any liabilities, by the number of shares outstanding. A NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio’s securities.  This number is important to investors, because it is from NAV that the price per unit of a fund is calculated.

The SEC found that in June 2008, UBSGAM bought 54 fixed income securities; most of them were purchases of non-agency mortgage-backed securities.  Forty eight of these securities were then valued at prices substantially in excess of the transaction prices, including many at least 100% higher.  The valuations used by UBS were provided by pricing sources that did not appear to take into account the prices at which the mutual funds had purchased the securities, the SEC said.  Because the Funds did not properly or timely fair value the Securities, the NAV’s of the funds were misstated between one cent and 10 cents per share for several days in June 2008, violating rule 22c-1 adopted pursuant to Section 22c of the Investment Company Act.  Merri Jo Gillette, Regional Director of the SEC’s Chicago Regional Office said “Fortunately this misconduct was brought to light quickly, so the duration was short and the harm to investors minimal.”

UBSGAM agreed to pay $300,000 to settle the SEC’s charges.

The Securities and Exchange Commission (SEC) has charged Life Partners Holdings, a publicly traded, Texas based financial services firm, and three of its senior executives: Chairman and CEO – Brian Pardo, President and General Counsel – Scott Peden, and its CFO – David Martin with disclosure and accounting fraud.

Life Partners buys and sells interests in life insurance policies on the secondary market. In these deals, life insurance owners sell their policies to investors in exchange for a smaller lump-sum payment.

A life settlement is a financial transaction in which the owner of a life insurance policy sells an unneeded policy to a third party for more than its cash value and less than its face value. A life settlement is an alternative to the surrender or lapse of a policy, or when the owner of a life insurance policy no longer needs or wants the policy, the policy is underperforming or can no longer afford to pay the premiums.

The SEC alleges that Life Partners executives misled shareholders by failing to disclose a significant risk to Life Partners’ business.  The company was underestimating the life expectancy rate used to price its transactions.  This estimate is an important and critical factor used to calculate the company’s revenue and profit margins.   Additionally, the accounting method used by Life Partners, overvalued the company’s assets creating the appearance of a steady stream of earnings from brokering the life settlement transactions.    As a result, the SEC says, Life Partners materially misstated net income from fiscal year 2007 through the third quarter of fiscal year 2011.

“Life Partners duped its shareholders by employing an unqualified medical doctor to assign baseless life-expectancy estimates to the underlying insurance policies,” said Robert Khuzami, head of the SEC’s enforcement division. “This deception misled shareholders into thinking that the company’s revenue model was sustainable when in fact it was illusory.”

Additionally, the SEC charged Pardo and Peden with insider trading, for allegedly selling shares of the company while having knowledge and in possession of material, non-public information showing that Life Partners, Inc. underestimated life expectancy estimates.   During this period of time, Pardo and Peden sold about $11.5 million and $300,000, respectively, of Life Partners stock at inflated prices, while knowing the revenue estimates were not accurate.