Prosecutors Investigating SEC Staff

In an interesting twist, the Wall Street Journal is reporting that federal prosecutors and the office of the inspector general of the U.S. Securities and Exchange Commission are conducting an investigation of the SEC's New York office for the possibility of improper investments.

According to Reuters, investigators are checking whether the employees' investments comply with SEC internal rules that prohibit trading shares of companies under investigation.

The article claims that the investigation appears limited to the New York office of the securities regulator, and there is no indication of widespread flouting of the rules, according to the report.

For more detail, visit U.S. authorities probing New York SEC staff investments -WSJ | Reuters

Court Questions SAC Capital Advisors Settlement.

In an interesting twist to the historic settlement of charges against Steven Cohen's hedge fund entities, Judge Richard Sullivan has not approved the settlement, saying he needs more information about the accord's fairness.

Citing the recent judicial "debate" about how closely to scrutinize regulatory settlements, U.S. District Judge Richard Sullivan directed SAC and the U.S. Department of Justice to address at a hearing on Wednesday morning what standard he should use to evaluate the civil forfeiture portion of the accord.

Separately, Sullivan's colleague, U.S. District Judge Laura Taylor Swain, scheduled a Friday hearing to review the criminal portion of the settlement in which SAC agreed to plead guilty to five fraud counts.

For more detail, visit U.S. judge won't rubber-stamp SAC insider trade decision 

The Impact of the SAC Capital Advisors Criminal Guilty Plea

In what will surely be viewed as a controversial outcome, SAC Capital Advisors will plead guilty to criminal fraud charges, stop investing money for others and pay $1.8 billion — the largest financial penalty in history for insider trading — to resolve criminal and civil claims against the hedge fund giant, the government announced Monday.

The controversy will revolve around the impact of convicting a corporation of a crime. After all, you cannot put the corporation in jail. Further, since a criminal conviction effectively puts the corporation of out business, the impact of that conviction impacts all of the customers, employees and vendors of the corporation. 

While I firmly believe that it is a mistake to charge a corporation with a criminal offense - for exactly the reason stated above, this case is a bit different. 

First, many of its traders have been indicted for insider trading. Second, although Mr. Cohen was not indicted, he is, and remains, the subject of an SEC case for failing to supervise his employees. Third, with all of the negative publicity, the press conferences and Internet sites calling the firm "a magnet for cheating" and having "a culture of law-breaking" we can assume that the firm would not have lasted much longer, with or without an indictment. Finally, despite the marginal merit to the claims against Mr. Cohen personally, I would expect to see a settlement with the SEC any day now.

So, the firm was out of business, regardless of the indictment. But does that make it right? I will leave the academic discussion to the academics - I am just a securities litigator - but threatening to put a corporation out of business because of the wrongful conduct of employees - not necessarily the owners or executives - is not a path that we want to go down. The government has enough power over us - using the criminal process to force change inside of private companies by threatening to put them out of business is not a process that we should be encouraging.

The plea does end the case, and most of the related cases. Acccording to CNN,  prosecutors told the Judges presiding over the pending cases, that the "proposed global resolution" of the criminal and civil cases against SAC Capital Advisors and related companies also includes an agreement that SAC will cease operating as an investment adviser and will not accept any additional funds from third-party investors.

So, SAC Capital Advisors is out of business, with or without a criminal record. In addition, the company will pay a $900 million fine and forfeit another $900 million to the federal government, though $616 million that SAC companies have already agreed to pay to settle parallel actions by the U.S. Securities and Exchange Commission will be deducted from the $1.8 billion.

For more information - Hedge fund giant SAC Capital to pay $1.8B penalty

SEC Loses Mark Cuban Suit

Years ago, in what we viewed as a far too convenient allegation, the SEC accused billionaire Mark Cuban of insider-trading. The allegations were odd - the SEC alleged that the CEO in question told Mr. Cuban, that he had confidential information to provide to him, and that Mr. Cuban agreed to keep it confidential. That allegation raises the question, can the CEO of a public company voluntarily provide material, non-public information to someone, and prevent that someone from trading? Is so, it is a great way to keep your largest shareholder from selling his stock - call him up and give him some inside information.

I have a number of blog posts on the case. All are collected in Mark Cuban SEC. All predicted a loss for the SEC, given the sheer lack of legal weight to the claims.

But that is not often enough. It is an unfortunate part of our society that the government often wins cases simply because the target of its ire does not have the ability to fight back. There are countless examples of small brokerge firms, investors and individual brokers who settle SEC, or FINRA cases simply because they cannot afford to fight, even though they are right.

I had the pleasure to represent a broker who did not back down from a fight with FINRA, who  refused to settle with them when he was right and FINRA was wrong. It was a time consuming and expensive fight, but we won, and FINRA lost.

It was therefore a pleasure to watch Mark Cuban fight back. He certainly has the financial ability, but he also had the nerve to do so. And, after only a few hours of deliberation, much of which was probably discussing football, so as to not embarass the SEC, the jury in federal district court in Dallas said that the Securities and Exchange Commission failed to prove the key elements of its case, including the claim that Cuban agreed to keep certain information confidential and not trade on it.

During an impromptu news conference outside the courthouse, Mark Cuban angrily denounced the SEC and its lead trial attorney, Jan Folena, saying that they lied about the evidence and targeted him because of his fame.

Mr, Cuban acknowledged that  defendants of lesser wealth could have been bullied.

''Hopefully people will start paying attention to how the SEC does business,'' Cuban said. ''I'm the luckiest guy in the world. I'm glad this happened to me. I'm glad I'm able to be the person who can afford to stand up to them.''

For more information - Jury says Cuban did not commit insider trading 

Previously Unknown Inside Traders in Heinz Settle SEC Charges

The Securities and Exchange Commission announced that two brothers in Brazil have agreed to pay nearly $5 million to settle charges that they were behind suspicious trading in call options for H.J. Heinz Company the day before the company publicly announced its acquisition.

The SEC filed an emergency enforcement action earlier this year to freeze assets in a Swiss-based trading account used to reap more than $1.8 million from trading in advance of the Heinz announcement.  The SEC’s immediate move the day after the announcement ensured the illicit profits could not be released out of the account while the investigation into the then-unknown traders continued.

In an amended complaint filed today in federal court in Manhattan, the SEC alleges that the order to purchase the Heinz options was placed by Rodrigo Terpins while he was vacationing at Walt Disney World in Orlando, and the trading was based on material non-public information that he received from his brother Michel Terpins.  The trades were made through an account belonging to a Cayman Islands-based entity named Alpine Swift that holds assets for one of their family members.  Rodrigo Terpins purchased nearly $90,000 in option positions in Heinz the day before the announcement, and those positions increased dramatically by nearly 2,000 percent the next day.

The Terpins brothers and Alpine Swift, which has been named as a relief defendant for the purposes of recovering ill-gotten gains, have agreed to disgorge the entire $1,809,857 in illegal profits made from trading Heinz options.  The Terpins brothers also will pay $3 million in penalties.  The settlement is subject to court approval.

For more detail, visit SEC.gov | Previously Unknown Insider Traders in Heinz Agree to $5 Million Settlement

Qualcomm Exec and Merrill Lynch Broker Charged with Insider Trading

The SEC has charged a former Qualcomm executive and his Merrill Lynch broker with insider trading in an elaborate scheme involving family members and off shore brokerage accounts.

The Securities and Exchange Commission said that former Qualcomm executive Jing Wang and his advisor, Gary Yin, made illegal trades in his company’s stock and that of a company purchased by Qualcomm. From 2006 to 2012, Yin and Wang both set up offshore entities to disguise their trades and hide some $271,644 in total profit, according to a complaint filed in U.S. District Court for the Southern District of California.

According to the SEC, Yin helped Wang set up “sham brokerage accounts,” which were registered in the British Virgin Islands under family members’ names to disguise ownership. The complaint also alleges that Yin created his own offshore account in the British Virgin Islands under the name of his mother-in-law.

The two funneled money into those accounts in order to make trades based on information such as the announcement of a Qualcomm revenue revision and the company’s 2011 acquisition of Atheros Communications, the SEC alleges.

His Financial Advisor With Insider Trading For more information, see SEC.gov | SEC Charges Former Qualcomm Executive and His Financial Advisor With Insider Trading Through Secret Offshore Accounts

SEC Charges RIA For False Statements to Investors and Investigators - Parallel Criminal Charges Filed.

Why don't these defendants learn? When confronted by government investigators, either tell the truth or don't talk. Simple. But this basic concept seems to elude them.Case in point - the Securities and Exchange Commission charged the owner of a New York-based investment advisory firm with defrauding investors while grossly exaggerating the amount of assets under his management, and announced that the defendant has pled guilty to criminal charges which included charges that he lied to investigators.  

The SEC alleges that Fredrick D. Scott registered his firm ACI Capital Group as an investment adviser and then embarked on a series of fraudulent schemes targeting individual investors and small businesses.  Scott repeatedly touted ACI’s registration under the securities laws and falsely claimed the firm’s assets under management to be as high as $3.7 billion to bolster his credibility when offering too-good-to-be-true investment opportunities.  As Scott solicited funds from investors after promising them very high rates of return, he simply stole their money almost as soon as they deposited it with ACI.  Scott paid no returns to investors and illegally used their money to fund such personal expenses as his children’s private school tuition, air travel and hotels, department store purchases, and several thousand dollars in dental bills.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York announced Scott has pleaded guilty to criminal charges.  Among the charges to which Scott has pleaded guilty is making false statements to SEC examiners when they questioned whether Scott and ACI had accepted loans from investors. 

SEC examiners notified the agency’s Enforcement Division, which began investigating and referred the matter to criminal authorities. “Scott told brazen lies about the value of ACI’s assets under management and its ability to deliver huge returns on various investments,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Our examination and enforcement staff aggressively pursue investment advisers who flout the registration provisions of the securities laws for their personal gain, especially those who attempt to cover up their misdeeds by flat-out lying to our examiners.”

According to the SEC’s complaint filed in federal court in Brooklyn, one variation of Scott’s fraud was a so-called advance fee scheme – Scott promised investors that ACI would provide multi-million dollar loans to people seeking bank financing.  But investors were told that they first needed to advance ACI a percentage of the loan amount, and once they did so they would receive the remaining balance of the amount that Scott promised to pay.  Scott had no intention of ever returning the money, nor did he repay it.

The SEC alleges that in another iteration of his fraud, Scott offered investors the opportunity to make a bridge loan to a third-party entity.  The investor was told to fund one portion of the loan, and ACI would supposedly fund the remaining balance.  In exchange, the investor would supposedly receive a substantial return on his initial investment.  In this scheme as with each of his others, investors never received returns and Scott stole the money.

The SEC’s complaint charges Scott with violating Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5, Section 207 of the Investment Advisers Act for filing a false Form ADV, and aiding and abetting ACI’s improper registration in violation of Section 203A of the Advisers Act.

More information is available at the SEC's site and the complaint is also online.

Money Manager Charged With Defrauding Investors and Firms

The SEC has charged a purported money manager in New York with conducting a free-riding scheme to defraud three brokerage firms, and then bilking several investors out of nearly a half-million dollars that he stole to fund his luxurious lifestyle that included a Bentley automobile, summers in the Hamptons, and casino junkets.
The SEC alleges that Ronald Feldstein caused more than $2 million in losses for the brokerage firms that he victimized in the free-riding scheme, which occurs when customers buy or sell securities in their brokerage accounts without having the money or shares to actually pay for them.  Feldstein opened three separate brokerage accounts in the names of two purported investment funds that he created.  He had no intention to pay for the stocks that he purchased if they resulted in big losses.  Feldstein planned to walk away from any transactions where the price declined substantially after the trade date, and planned to use sales proceeds to pay for the purchases if the price of a stock increased.
The SEC further alleges that Feldstein later began soliciting investments by targeting owners of businesses that he had frequented for decades, including a dry cleaner and a car leasing and servicing company.  Feldstein convinced them to provide funds for him to invest on their behalf, promising such profitable opportunities as a successful hedge fund, a promising penny stock, and an initial public offering (IPO) of a fashion company.  However, Feldstein never invested this money, instead converting it for his personal use without their knowledge.

“Without sufficient assets to pay for his stock purchases, Feldstein illegally arranged trades in which he got the profits if he won and left brokerage firms holding the bag if he lost.”
-Andrew M. Calamari, Director of the SEC’s New York Regional Office. 

The complaint does not address how this scheme was discovered, or why the free-riding scheme went undetected for any period of time. Brokerage firms have the obligation to detect free-riding and to take steps to prevent such activities. My firm has the experience to assist firms in creating such compliance systems, as well as assisting firms, and investors, in recovering losses from fraudulent investment practices.
Give us a call at 212-509-6544. We represent all market participants, nationwide.
SEC.gov | SEC Charges Purported Money Manager With Defrauding Investors and Brokerage Firms

Cell Phones Do Not Avoid Insider Trading Charges

While we have successfully defended professionals and investors in insider trading cases, those defenses are usually based on the fact that the client did not trade on such information. We do not win such cases because the investor hid his trading activity, but it is interesting to see what those trading on inside information do in order to avoid detection.

The most recent example, the SEC announced insider trading charges against a former systems administrator at Vermont-based Green Mountain Coffee Roasters who repeatedly obtained quarterly earnings data and traded in advance of its public release. According to the Commission, they traded out of the money options before earnings announcements and gained $7 million dollars in profits. The Commission alleges that they communicated with each other by voice and text messages using their wives' cellphones.

Pretty clever. No one would ever think of issuing a subpoena for my wife's cell phone in an insider trading investigation!

None of this works. First, let's keep in mind that the Commission and the exchanges have extensive records of trading activity. The regulators know, at a minimum, which brokerage firm had clients purchasing stock, or options, in the days, weeks, or even months leading up to an event. It is not difficult for the regulators to issue requests to the firms for the identity of the customer who made suspicious purchases.

From there the SEC Staff issues a document request to the customer, his brokerage firm, and ultimately his bank, his telephone company and any other entity, following the money. Ultimately the Staff takes the customer's testimony under oath,

At that time, the customer is faced with a choice - assist the investigation and testify, or refuse to testify and assert his rights under the Fifth Amendment. The latter choice is not always the right choice, and there are complications in doing so, but it is an option, and one that we sometimes recommend to our clients. Of course,there is a third choice - testify and lie - but that is not an option, as many targets of investigations have found, including Martha Stewart. She did a year for obstruction, and then settled the insider trading case.

The reality is that if you are going to trade on inside information, you are probably going to get caught, and if you are not trading on inside information, you don't have to go through hoops to hide your activity. In this case, this team of investors correctly predicted the company's stock price reaction to 12 of the past 13 quarterly earnings announcements. I once had a federal court judge tell me, during an insider trading trial, that "you don't pull a royal flush in 4 out of 5 poker hands." So too here.

But what I found interesting was the that the SEC alleges that as an information technology employee, McGinnis had access to shared folders on Green Mountain Coffee’s computer server where drafts of pending press releases and earnings announcements were stored.  He also had access to other employees’ e-mail accounts.  Both sources provided McGinnis with details about upcoming Green Mountain Coffee earnings announcements before they became public.

Plus, although the technology officer lives in Vermont, and his partner lives in Connecticut, according to the SEC, much of the insider trading in their online brokerage accounts occurred through McGinnis’ home Internet service.  They communicated frequently around earnings announcements, but infrequently otherwise.
But I am sure they thought they were being clever, according to the SEC, around trading times, they exchanged numerous phone calls and text messages  using cell phones belonging to their spouses.
It doesn't work. The SEC will figure it out eventually, and when they do, the penalty is THREE TIMES your profits. Not three times your net trading profits; three times the profit on the trades that the SEC says were made with inside information. They ignore the losers, by the way.

The solution? The obvious one is not to trade on inside information. More importantly, be careful when you trade on tips received from friends or colleagues, and document the trades that you do make. And if you are in the unfortunate position of being investigated for insider trading, retain an experienced securities attorney at the start of the investigation. Do not go it alone, the downside, which can include criminal charges, are simply too great.

SEC.gov | SEC Charges Former Green Mountain Coffee Employee And Friend In $7 Million Insider Trading Scheme

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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of insider trading investigations and enforcement actions. We represent investors, financial professionals and investment firms nationwide. For more information contact Mark Astarita at 212-509-6544 or at mja@sallahlaw.com

• More posts on insider trading at The Securities Law Blog, including SEC Loses Insider Trading Trial

JP Morgan Facing Criminal and Civil Charges For Mortgage Security Fraud

On the heels of the announcement of charges against Bank of America for fraudulently selling investors mortgage backed securities, JPMorgan Chase disclosed on Wednesday that it faced a criminal and civil investigation into whether it sold shoddy mortgage securities to investors in the run-up to the financial crisis,

According to the New York Times, JPMorgan has acknowledged fthe existence of the investigation — one of several mortgage-related problems looming for the bank — in a quarterly regulatory filing. It said that the civil division of the United States attorney’s office for the Eastern District of California, has “preliminarily concluded” that JPMorgan flouted federal laws with its sale of subprime mortgage securities from 2005 to 2007. The parallel criminal inquiry, according to one person briefed on the matter, is in a more preliminary stage.

Adding to scrutiny of the bank, the NYT is also reporting that federal prosecutors in Philadelphia are examining whether JPMorgan duped investors into buying troubled mortgage securities that later imploded, The prosecutors are investigating whether JPMorgan churned out the mortgage-backed securities without ensuring that the investments met underwriting standards,

Representatives for the bank and the federal prosecutors declined to comment.

For more information - JPMorgan Reveals It Faces Criminal and Civil Inquiries
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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the representation of individual and institutional investors who have been defrauded. We represent investors, financial professionals and investment firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at email us

SEC Halts Ex-Marine’s Fraud

The Securities and Exchange Commission today obtained an emergency court order to halt a hedge fund investment scheme by a former Marine living in the Chicago area who has been masquerading as a successful trader to defraud fellow veterans, current military, and other investors.

The SEC alleges that Clayton A. Cohn and his hedge fund management firm Market Action Advisors raised nearly $1.8 million from investors through a hedge fund he managed.  Cohn lied to investors about his success as a trader, the performance of the hedge fund, his use of investor proceeds, and his personal stake in the hedge fund.  Cohn only invested less than half of the money raised from investors and instead used more than $400,000 for such personal expenses as a Hollywood mansion, luxury automobile, and extravagant tabs at high-end nightclubs. He used his lavish lifestyle to carefully contrive the image of a successful trader and investor, when in reality he lost nearly all of the money invested through the hedge fund.

In order to cover up his fraud and continue raising money from investors, Cohn generated phony hedge fund account statements showing annual returns exceeding 200 percent. “Cohn lured fellow military and other investors into his hedge fund by portraying himself as a successful trader who generated massive returns for his investors,” said Timothy L. Warren, Acting Director of the Chicago Regional Office.  “But Cohn’s hedge fund investors didn't have a chance to make a profit since he never invested most of their money and promptly lost the portion he did invest.”

According to the SEC’s complaint filed in federal court in Chicago, Cohn targets mostly unsophisticated investors and has solicited friends, family members, and fellow veterans to invest in his hedge fund.  Cohn controls a so-called charity called the Veterans Financial Education Network (VFEN) that purports to teach veterans how to understand and manage their money.  Cohn has touted his Marine Corps pedigree in VFEN press releases and encourages veterans to find “a money-manager who is both trustworthy and knows what he is doing.” VFEN’s website identifies Cohn as a money manager who “manages millions of dollars.”
According to the SEC’s complaint, Cohn managed his hedge fund Market Action Capital Management through his investment advisory firm Market Action Advisors, which is registered with the state of Illinois.  Cohn solicited investments by falsely claiming that he had major success as a personal trader and invested $1.5 million of his own money in the hedge fund.  He also misrepresented that an accounting firm would audit the hedge fund’s financial statements.

The SEC alleges that Cohn had a record of trading losses, invested no more than $4,000 of his own money, and absconded with far more money for his personal expenses.  The audit firm named by Cohn never agreed to audit the fund’s financial statements.  Cohn continued to deceive investors after their initial investment by issuing account statements that showed annual returns of more than 200 percent for 2012 when the hedge fund actually lost money.   The SEC’s complaint charges Cohn and Market Action Advisors with violating the antifraud provisions of the federal securities laws.  The court granted the SEC’s request for emergency relief including a temporary restraining order and asset freeze.  The SEC further seeks permanent injunctions, disgorgement of ill-gotten gains, and financial penalties from Cohn and Market Action Advisors.

For more information - SEC.gov | SEC Halts Ex-Marine’s Hedge Fund Fraud Targeting Fellow Military
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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at email us

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SAC Capital Indicted - Why Bother?

Well the other shoe has dropped. The US Attorney announced the filing of criminal charges against Steven Cohen's firm, SAC Capital. The 41-page indictment that includes four counts of securities fraud and one count of wire fraud, prosecutors charged the fund and its units with carrying out a broad insider trading scheme between 1999 and 2010.

While the government apparently cannot prove that Mr. Cohen had knowledge of the trading, since only an administrative proceeding has been filed against him, the case seeks to attribute certain criminal acts of employees to the company itself, claiming that the fund “enabled and promoted” the illicit behavior.Corporations are "legal persons," capable of suing and being sued, and capable of committing crimes. Under the doctrine of respondeat superior, a corporation may be held criminally liable for the illegal acts of its directors, officers, employees, and agents. To be held liable for these actions, the government must establish that the corporate agent's ations (i) were within the scope of his duties and (ii) were intended,at least in part, to benefit the corporation.

But why bother? There is no jail in which to place a corporation, what is gained, other than headlines? There are a couple of reasons, but principally one - to put the entity out of business. While it is theoretically possible to hold corporate officers liable for the crimes committed by the entity, in reality that is extremely difficult. The goal here is undoubtedly to shut down SAC Capital, not to put it in jail.

The indictment will undoubtedly cause problems for the firm. Many investors do not like publicity, and in partular did not want to be associated with an entity that has been indicted. So, the firm loses investors, and thus capital. In addition, the indictment may trigger termination clauses in the firm's investment and financial agreements triggering termination of important financiing agreements.

There is also the financial penalties available in a criminal case. in the indictment, the government is seeking forfeiture of "all property, real and personal, which constitutes or is derived from proceeds traceable to the commission of those offenses" which are set forth in the indictment under Title 18, United States Code, Section 981(a) (1) (C), and Title 28, United States Code, Section 2461. Given the fact that the indictment alleges hundreds of millions of dollars in profits, the forfeiture provisions post a significant threat to SAC Capital's continued existence.

SAC Capital Is Indicted

SEC Files Admin Proceeding Against Steven A. Cohen

After months of speculation, the SEC filed administrative proceedings against Steve Cohen, the founder of SAC Capital Advisors, one of the largest and most well known hedge funds in the country.The fact that they filed an administrative proceeding rather than a civil case in court, indicates that they do not believe they can prove that there was fraud involved in their investigation, and that they do not believe he was engaged in insider trading. If they thought they could prove insider trading, they certainly would have been a civil, if not criminal case.

The charges involve allegations that he failed to supervise his employees and to prevent them from engaging in insider trading. Specifically, the Commission alleges that on two separate occasions in 2008, two portfolio managers who reported to Cohen obtained material nonpublic information about three different publicly traded companies. The Commission alleges that both portfolio managers provided information to Cohen indicating that they may have had access to inside information to support their trading. Based on that information, both portfolio managers engaged in unlawful insider trading. 

That is a typical SEC-style allegation. The allegations are full of innuendo and speculation, and perfectly innocent statements and text messages presented as "evidence" of wrongful conduct. The Commission does NOT allege that the managers told Cohen that it was inside information, it alleges that the information indicated that they may have had access to inside information. Those two statements are very different, but undoubtedly intended by the Staff to imply that Cohen knew it was inside information.

Clearly that is not the case, or this would not be an administrative proceeding. I think we can confidently conclude that the Commission does not have any information that Cohen knew of the use of any inside information.

This becomes clear when the Commission alleges that "Cohen received highly suspicious information that should have caused any reasonable hedge fund manager in Cohen’s position to take prompt action to determine whether employees under his supervision were engaged in unlawful conduct and to prevent violations of the federal securities laws."

Parsing the Commissions factual allegations there are far too many conclusions, such as "Cohen was aware" and implications to convince me that the Commission has a case. Clearly, if they had evidence that Mr. Cohen was in fact "aware" and allowed the trades to be placed he would be the subject of an insider trading case, not a failure to supervise case.

While this all makes for interesting reading and exploration to securities attorneys who are interested in insider trading cases, really is not fun and games. The Commission spent a significant amount of time investigating Mr. Cohen for insider trading, undoubtedly hoping to catch a career making big fish. Obviously there was no such case.

However, rather than closing the investigation, they file this administrative proceeding, which could have a significant impact on Mr. Cohen's ability to conduct business. Although the Commission did not ask for any specific relief in its complaint, in the press release they claim that they will be seeking financial penalties as well as a "supervisory and financial services industry bar."

We will continue to review the allegations, but at this point in time it appears that not only is the proceeding excessive, discussions of "financial services" bars are a flight of fantasy.

We will update as the case progresses.

Press Release:SEC Charges Steven A. Cohen with Failing to Supervise Portfolio Managers and Prevent Insider Trading

The Administrative Order Filing the Charges 

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SEC Charges Former Medical Device Company Employee for Illegally Tipping Brother with Quarterly Earnings Data

The SEC charged a former employee at a California-based medical device manufacturer with illegally tipping confidential financial data to her brother, who illegally traded in the company's stock and enabled his hedge fund clients to do the same.

The SEC alleges that the former employee, who worked in the finance department at Abaxis Inc., regularly provided material nonpublic information to her brother, whose insider trading in advance of the company's quarterly earnings announcements generated $144,910 in illicit profits. The brother, who was charged by the SEC last year, also passed confidential information to clients of his equity research firm Insight Research, including hedge fund managers.

To settle the SEC's charges, the former employee has agreed to pay $144,910 and be barred from serving as an officer or director of a public company for five years.

"When corporate insiders leak confidential information to a select few, the integrity of our markets is undermined," said Sanjay Wadhwa, Senior Associate Director of the SEC's New York Regional Office. "Abaxis entrusted [the former employee] with market-moving information, and she violated that trust to financially benefit her family."

The SEC's charges stem from its ongoing investigations into expert networks that have uncovered widespread insider trading at several hedge funds and other investment advisory firms. The investigations have so far resulted in enforcement actions against 40 entities or individuals who have reaped more than $430 million in alleged insider trading gains.

For more information, visit SEC Charges Former Medical Device Company Employee for Illegally Tipping Brother with Quarterly Earnings Data.

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Reviewing Advisor Custody Issues

The SEC has just released a Risk Alert calling attention to the results of its recent examinations of investment advisor firms. Incredibly, the SEC found that 1/3 of the firms that were reviewed had significant issues with custody of their customers' securities.

The SEC found that a significant number of firms did not even realize that they had "custody" of a client's funds or securities within the meaning of the custody rule (Rule 206(4)-2 under the Advisers Act). According to the Alert, the SEC found advisors failing to comply with the custody rule in the following circumstances:

• The Role of Employees or Related Persons:The adviser’s personnel or a “related person” serve as trustee or have been granted power of attorney for client accounts.

• Bill Paying Services: The adviser provides bill-paying services for clients and, therefore, is authorized to withdraw funds or securities from the client’s account

• Online Access to Client Accounts: The adviser manages portfolios by directly accessing online accounts using clients’ personal usernames and passwords without restrictions and, therefore, has the ability to withdraw funds and securities from the clients’ accounts

• Adviser Acts as a General Partner: The adviser serves as the general partner of a limited partnership or holds a comparable position for a different type of pooled investment vehicle.

• Physical Possession of Assets: The adviser has physical possession of client assets, such as securities certificates.

• Check Writing Authority: The adviser or a related person has signatory and check writing authority for client accounts.

• Receipt of Checks Made to Clients: The adviser received checks made out to clients and failed to return them promptly to the sender

Advisors who have actual, physical custody of securities, as well as advisors in these situations, must comply with the custody rules. Failing to do so can have significant ramifications for the advisors, and places customer funds at risk.

If you have any questions or concerns regarding compliance with the custody rule, or any other rule or regulation under the Investment Advisers, send us an email. Our attorneys have decades of experience in securities regulation and compliance and include former in-house attorneys and former SEC enforcement attorneys. Email us at astarita@beamlaw.com with your questions or concerns.

Defending 10b5-1 Plans

We haven't seen much interest in Rule 10b5-1 plans recently. I suppose that a declining market during recent years tempered the desire to sell stock. If so, we should see a rise in the interest in such plans once again.

For those unfamiliar with these plans, a 10b5-1 plan is used by insiders in public company to sell securities of their company, without running afoul of insider trading laws. The plans are detailed, specific plans that are designed to let executives sell off shares at regular intervals, regardless of events inside the company at the time of the sales. Properly structured and executed, the plans provide a clear defense to an insider trading allegation.

Years ago the SEC began investigating the use of the plans, or rather the alleged abuse of the plans. According to the Commission, some executives were attempting to modify their plans as events at the company unfolded, causing potential violations of Rule 10b5-1, the SEC rule that permits the use of such plans. I wrote about the issue back then - 10b5-1 Plans Under Attack.

Along with a potential increase in the use of the plans, the Commission is once again looking into the use of the plans. According to the Harvard Law School Forum on Corporate Governance and Financial Regulation,  several recent Wall Street Journal articles suggest that some executives may have achieved above-market returns using the plans. These articles are reported to have drawn the interest of federal prosecutors and the SEC enforcement staff.

The problems that we have seen in the plans are in the execution of the plan itself, not in the creation of the plan. Defending executives in an SEC investigation over the use of a 10b5-1 plan  should not be a difficult endeavor. As noted in the article, although regulators and the media may scrutinize trades made under 10b5-1 plans even when above board and done according to best practices, a well-thought-out and implemented 10b5-1 plan may help a company and its executives avoid or ultimately refute accusations of impropriety.

More details are available at Rule 10b5-1 Plans: What You Need to Know

The attorneys associated with my firm include former SEC Senior Enforcement Attorneys and criminal prosecutors. In addition, I have been representing executive, financial professionals and firms in regulatory investigations and proceedings for over 25 years. If you have a question regarding an investigation, give me a call or send me an email - 212-509-6544 or astarita@beamlaw.com

Related articles

• Introduction to Insider Trading - The Legal vs. The Illegal
• SEC Intensifies Scrutiny on Stock Sales by Insiders and 10b5-1 Plans 
• The Fine Line Between Legal, and Illegal, Insider Trading 
• The Best-Laid Plans of 10b5-1 
• SEC Says Congressional Insider Trading Not Illegal

Securities Enforcement and Social Media

Securities enforcement defense is a significant part of our practice. Last month we saw an important development in the application of securities law to social media. For the first time, the Enforcement Division of the SEC issued a Wells Notice based on a social media communication. We covered the news and the interaction of the securities laws and Facebook when the story broke. On the surface, this doesn't appear to be much of a Reg FD issue, given the prior release of the information, and the vast following that Netflix's CEO has on Facebook.

But it does raise a number of interesting questions. Even more if you are a securities defense attorney who is a computer-geek-wannabe and something of a social media expert.

The Harvard Law School Forum on Corporate Governance and Financial Regulation examines the issue and  the potential for liability arising from disclosures by corporate officers through social media in its article
Applying Securities Laws to Social Media Communications

SEC Charges Germany-Based Allianz SE with FCPA Violations

The SEC charged Germany-based insurance and asset management company Allianz SE with violating the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA) for improper payments to government officials in Indonesia during a seven-year period.

The SEC’s investigation uncovered 295 insurance contracts on large government projects that were obtained or retained by improper payments of $650,626 by Allianz’s subsidiary in Indonesia to employees of state-owned entities. Allianz made more than $5.3 million in profits as a result of the improper payments.

Allianz, which is headquartered in Munich, agreed to pay more than $12.3 million to settle the SEC’s charges.

“Allianz’s subsidiary created an 'off-the-books' account that served as a slush fund for bribe payments to foreign officials to win insurance contracts worth several million dollars,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.

According to the SEC’s order instituting settled administrative proceedings against Allianz, the misconduct occurred from 2001 to 2008 while the company’s shares and bonds were registered with the SEC and traded on the New York Stock Exchange. Two complaints brought the misconduct to Allianz’s attention. The first complaint submitted in 2005 reported unsupported payments to agents, and a subsequent audit of accounting records at Allianz’s subsidiary in Indonesia uncovered that managers were using “special purpose accounts” to make illegal payments to government officials in order to secure business in Indonesia. The misconduct continued in spite of that audit.

For more information, visit SEC Charges Germany-Based Allianz SE with FCPA Violations.

Facebook Post Leads to Reg FD Problems for Netflix

Regulation FD requires companies to make announcements of material information to all investors at the same time. Adopted in 2000, the regulation is intended to help insure that all investors receive equal access to information.

Undoubtedly an unattainable goal, but it is the law. This week, Netflix learned that the hard way. Reed Hastings, the chief executive of Netflix, congratulated his team for a job well done in early July. On his public page, he crowed about the one billion hours of video that subscribers watched the previous month. The message was just 43 words.

Now, Netflix and its chief may be in deep trouble for that brief post. On Thursday, Netflix disclosed that the Securities and Exchange Commission was considering taking action against the company and Mr. Hastings for its Facebook communication. The SEC sent Netflix and Hastings a Wells Notice, warning that it may file civil claims or seek a cease-and-desist order.

Related articles

• Netflix Exposes Reg FD Flaws (fool.com)
• Rex On Techs: There is no middle ground with Netflix (marketwatch.com)
• Hastings deserves SEC scrutiny (finance.fortune.cnn.com)

SEC Insider Trading Cases

As our readers and followers are aware, part of our practice is the representation of targets, defendants and potential defendants in insider trading investigations and complaints. Since 1985 when I was part of the defense team for the first civil prosecution of insider trading under the misappropriation theory, this specific area of the law has been part of my practice.

In SEC vs. Materia, the trial court found that Mr. Material, a financial printing firm employee, misappropriated confidential information from his employer and traded on that information. The Second Circuit adopted that reasoning, paving the way for the Supreme Court's adoption of the misappropriation theory of insider trading some 13 years later.

That case, and the entire concept of the misappropriation theory has always struck me as being wrong and intellectually dishonest. The "fraud" is not connected to the purchase or sale of a security, and the misappropriation theory simply reads the "in connection with" requirement of 10b-5 out of the statute.

However, I can't change the law, and today, with my new association with former SEC Senior Enforcement Attorneys Jim Sallah and Jeff Cox, we continue to represent those accused of insider trading across the country, and have expanded that area of our practices.

In doing so, we have  noticed an increase in insider trading cases brought by the Commission, which was recently confirmed by the SEC. In the recap of recent insider trading cases posted at the SEC's website, the Commission provides information regarding the 57 insider trading cases that it has brought over the last two calendar years.

Many of these cases have been discussed here on our blog, but the SEC provides information on their cases brought since 2009.  As we have noted in the past, the types of individuals accused of insider trading is interesting, and includes an Investment Bank Analyst, a Public Relations Executive, Former Major League Baseball Players, a Pharmaceutical Company Executive, Five Physicians, the Founder of Equity Research Firm, a Yahoo Executive and Ameriprise Manager, a Movie Producer and Ring of Relatives and Associates, an Expert Consulting Firm  and a host of stock brokers, traders and hedge fund managers.

The entire list is at the Commission's web site, and although they do not trumpet the cases they lost, such as the one they lost in Florida last year, where Jim Sallah successfully defended a doctor in an insider trading case, the list is an interesting look at those recent enforcement cases.

SEC List of Recent Insider Trading Cases

Related articles

• Lucky 7: The Insider-Trading Schemes That Paid the Most
• NewsWatch: SEC alleges largest-ever insider-trading scheme
• Hedge funder faces insider trading charges
• Ex-SAC Capital Trader Charged in $276 Million Insider Trading Scheme
• Former J. Crew Exec Settles SEC Insider Trading Charges