Recent SEC cases include false advertising, disclosure issues, fraudulent investing schemes, alterations of documents, insider trading and trading/filing violations.
Policies and Procedures/Disclosure Issues
According to the SEC, Strategic Capital Group of Gig Harbor, WA engaged in over 1,100 principal transactions without disclosing required information to clients or obtaining consent. Additionally, Strategic Capital Group allegedly provided false and misleading advertisements to investors. For example, one advertisement did not deduct fees from the presented results figure thus implying a significantly better return than the reality.
The SEC determined that the firm’s CEO George Price caused these violations and that the firm’s compliance program was inadequate.
The SEC charged Barclays Capital with failing to adequately maintain a compliance program after acquiring the advisory business of Lehman Brother in 2008. For example, the SEC found that Barclays executed 1,500 principal transactions without getting proper consent and charged commission fees for 2,785 advisory client accounts that were inconsistent with prior disclosures made to those clients.
Barclays paid a $15 million penalty and hired an independent compliance consultant to conduct an internal review. Additionally, Barclays has spent $3.8 million to reimburse or credit the clients who were affected.
Fees and Expenses
Staten Island resident Anthony Coronati was charged with conducting several fraudulent securities offerings and siphoning money for personal use. Mr. Coronati would present himself as an investment adviser to a hedge fund to potential investors. However, Coronati’s hedge fund did not exist, and he spent investors’ money on a Caribbean vacation and plastic surgery.
When he ran out of money from the fraudulent scheme, Coronati began to offer membership interests in his company Bidtoask LLC. Coronati and Bidtoask promised to invest in promising pre-IPO tech start-ups. However, Bidtoask hid a significant number of fees from investors.
Coronati has been barred from the securities industry.
A Bay Area hedge fund manager was accused of taking an excessive amount of management fees from the hedge fund he managed. Mr. Cooper remodeled his home and bought a Porsche with the stolen money, over $320,000.
WestEnd Management, Cooper’s former employer, is being charged separately. The SEC alleges that the firm did not adequately monitor Cooper’s activities and essentially allowed him to use the fund as his personal bank account.
The SEC filed charges against New York investment advisory firm Lincolnshire Management with breaching its fiduciary duty by combining expenses from two separate portfolio companies. The companies were separately advised and had different sets of investors, but were managed as one company. This created variances in practice from what was disclosed to the relevant set of investors, including payment of significant amounts of unnecessary fees.
Lincolnshire has agreed to pay $2.3 million to settle the SEC’s charges.
Fabrication of Documents
The SEC announced an enforcement action against a former Wells Fargo compliance officer, Judy K. Wolf, asserting that she altered documents to make it appear as if she had done a more thorough investigation into suspicious trading activities than was actually conducted. Wells Fargo was previously charged in an administrative proceeding and settled for a $5 million penalty. Initially, Wolf had denied the fabrication charges but has since admitted to altering documents.
In our last round up, we reported on SEC vs. Eydelman et al., a case in which the SEC charged a stockbroker and a law firm clerk with insider trading. In this case, a middleman was recruited in an effort to avoid contact with each other.
On September 19th, the SEC identified Frank Tamayo as the middleman. Mr. Tamayo wrote notes regarding stocks on either Post-it notes or napkins at different eateries and bars in New York City near Grand Central Terminal. After divulging stock tips, Mr. Tamayo would chew or eat the post-its or napkins. After divulging information, Tamayo would exchange emails with the law firm clerk to give the appearance that the trades were based on legitimate research.
Two people were charged with insider trading based on information regarding a hedge fund’s negative opinion of Herbalife Ltd. Filip Szymik learned from his roommate, an employee of Pershing Square Capital Management that the firm, was going to announce its negative view of Herbalife publicly. He relayed this information to Jordan Peixoto who then purchased put options one day before the announcement. The SEC found that Szymik and Peixoto violated the antifraud provisions of the federal securities laws.
In a final insider trading case, that the SEC charged two Wells Fargo employees in a scheme involving ratings. Gregory T. Bolan Jr., a research analyst at the bank, would tip off Joseph C. Ruggieri, a trader, before his department released market changing ratings. Bolan also gave tips to a friend outside of Wells Fargo who is since deceased. Ruggieri and Bolan’s friend would make their trades overnight before ratings were changed. The SEC identified Ruggieri’s suspect trades because they were inconsistent with his typical trading behavior. Ruggieri made more than $117,000 as a result of the scheme.
In a continuing enforcement initiative, the SEC has brought sanctions against 19 different private equity firms and hedge fund managers as well as one individual trader that participated in offering a secondary offering after short-selling it during a restricted period. The charges were based on Regulation 105 of Rule M that is intended to prevent manipulation of stock prices. The firms and the individual trader agreed to pay a combined total of $9 million in penalties, interest and disgorgement.
The SEC announced charges against 28 officers, directors and major shareholders in addition to six publicly traded companies for failing to make Section 16 filings regarding holdings and transactions in their own company’s stock. 33 of the 34 individuals and companies have agreed to settle and pay a combined total of $2.6 million in penalties.