More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Charges of insider trading in a secondary stock offering, accounting violations, insider trading around an acquisition and efforts by a phony company president to push a fake penny-stock investment were among enforcement actions taken by the SEC, while FINRA censured and fined a firm for a registered representative’s unsuitable and excessive trading in client accounts.
CEO Charged with Insider Trading in Secondary Stock Offering
The chairman and CEO of a Santa Ana, Calif.-based computer storage device company was charged by the SEC with insider trading on shares of his own company’s stock in a scheme that had netted him and his brother $134 million apiece.
The agency alleged that Manouchehr Moshayedi intended to take advantage of a dramatically upward trend in the stock price of STEC by deciding to sell a significant portion of his stock holdings as well as shares owned by his brother, a company co-founder. The sale was to be a secondary offering, set to coincide with the release of the company’s financial results for the second quarter of 2009 and its revenue guidance for Q3.
However, the SEC alleged that Moshayedi found out shortly before the offering was to take place that his company’s largest customer, EMC Corp., had changed its mind. EMC, which had agreed to buy $120 million worth of STEC’s flagship flash memory product, a solid-state drive (SSD) called ZeusIOPS, in the third and fourth quarters of 2009, no longer intended to do so. Instead, EMC’s Q3 demand for the SSD was far lower than STEC had anticipated, and EMC also told Moshayedi that it would never again enter into a similar agreement with STEC.
Instead of informing investors abut the change in projected growth, Moshayedi kept the information to himself and responded to EMC by concocting a secret side deal so that the company would make its Q3 numbers. He also sold the 9 million shares he had intended to, making a hefty profit.
The SEC seeks a final judgment ordering Moshayedi to disgorge his own ill-gotten gains and the trading profits of his brother Mehrdad Mark Moshayedi, pay prejudgment interest and financial penalties, and be permanently barred from future violations and from serving as an officer and director of any registered public company.
SEC Penalizes Consulting Firm, Execs Nearly $1.3 Million on Accounting Violations
Without admitting or denying the SEC’s findings, Huron Consulting Group, a provider of financial and operational consulting services to clients in various industries, former Chief Financial Officer Gary Burge and former controller and Chief Accounting Officer Wayne Lipski agreed to settle charges by the agency over accounting violations that overstated the company’s income for multiple years.
Huron agreed to pay a $1 million penalty. Burge and Lipski agreed to pay a total of nearly $300,000 in disgorgement and penalties to settle the charges.
The SEC found that Huron failed to properly record redistributions of sales proceeds by the selling shareholders of four firms acquired by Huron. The selling shareholders redistributed the money to employees at those firms who stayed on to work at Huron, as well as to other Huron employees and themselves.
Huron’s financial statements for 2006, 2007, 2008 and the first quarter of 2009 were materially misstated as a result of these accounting failures. In August 2009, Huron restated those results, thus reducing its net income by approximately $56 million.
Too Friendly: Insider Trading Charges Brought on Company Acquisition
Ladislav “Larry” Schvacho, close friend of Larry L. Enterline, CEO of Comsys IT Partners, a Houston-based employment services company, was charged by the SEC with taking advantage of his friendship with Enterline to engage in insider trading around the acquisition of Comsys by another staffing firm. The SEC acknowledged the assistance of FINRA in the matter.
The SEC alleged that Schvacho, who lived in Georgia at the time of his illegal trading, made approximately $511,000 in illicit profits by using inside information to trade around the acquisition of Comsys—nonpublic information he gleaned from his relationship with Enterline while the Comsys CEO called other Comsys executives to discuss the acquisition and through confidential, merger-related documents to which Schvacho had access.
According to the SEC’s complaint filed in U.S. District Court for the Northern District of Georgia, the friendship between the two dated back to the 1970s when they were coworkers. Over the years they remained close and often shared confidential information with each other, and, given their close relationship and long history of sharing confidences, Enterline made no attempt to hide the impending acquisition by Manpower. Instead, he reasonably expected Schvacho would refrain from disclosing or otherwise misusing the confidential information.
Schvacho, however, began purchasing Comsys stock the next business day after he learned of the acquisition. He continued to acquire more stock, especially after he gained access to Enterline’s merger-related documents during a vacation. Altogether, he purchased approximately 72,000 shares of Comsys stock in the weeks leading up to a public announcement on Feb. 2, 2010—at which time he immediately sold half his shares.
Phony President Touted Fake Penny-Stock Investment
The SEC filed charges against Ronald Feldstein of New York, alleging that he had posed as the president of a nonexistent company solely to push a sham investment.
According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Ronald Feldstein pretended to be the president of a private company, LED Capital Corp., and purportedly committed LED Capital—which in reality had no operations or assets—to pay $6 million for a minority block of shares in penny-stock issuer Interlink-US-Network that had an actual market value of less than $1.2 million.
The actual owner of LED Capital told SEC investigators that he has been the sole officer-stockholder of the company and never knew anything about Feldstein’s agreement. Further, he testified that Feldstein had no authority or permission to act on behalf of the company, which he said doesn’t and likely never would have $6 million available to it.
For his performance as the phony president of LED Capital Corp., Interlink awarded Feldstein shares of its common stock that had a market value of more than $400,000.
Feldstein also assisted in the final version of Interlink’s Form 8-K filing with the SEC to disclose the purported agreement. He offered criticism of the draft version of the final “memorandum of understanding,” then separately signed a memorandum of understanding on behalf of “LED Capital LLC”—a nonexistent company with a similar name to LED Capital Corp. On Dec. 14, 2010, Interlink filed with the SEC the version of the Form 8-K that reflected Feldstein’s input.
Last year the SEC charged Interlink as part of a complaint against several perpetrators of an alleged green product-themed Ponzi scheme.
FINRA Censures RBC Capital Markets in Unsuitable, Excessive Trading
Without admitting or denying the findings, RBC Capital Markets Corp., n.k.a. RBC Capital Markets LLC, consented to censure, a fine of $200,000, and an order to pay $70,000 in partial restitution to a customer over FINRA findings that one of its registered representative engaged in unsuitable, excessive trading in elderly customers’ accounts by purchasing closed-end funds (CEFs) for them at the initial public offering (IPO), but then selling the CEFs within the next several months.
The representative also exercised discretion in several accounts, according to FINRA, without the customers’ written authorization or the firm’s written acceptance of the accounts as discretionary. The elderly customers lost a total of approximately $390,000 in their accounts.
FINRA found that the firm underwrote IPOs involving CEFs, but did not have a system and written procedures reasonably designed to detect and prevent patterns of unsuitable short-term trading of CEFs, including those purchased at the IPO. The firm’s WSPs failed to address the suitability of recommendations involving CEFs, and did not provide any guidance to supervisors about potential abuses relating to short-term trading sales of CEFs purchased at the IPO.
FINRA also found that the firm filed an inaccurate Uniform Termination Notice for Securities Industry Registration (Form U5) for the registered representative. In response to a disclosure question, the firm reported that the registered representative was not under internal review at the time of his termination when, in fact, he had been under such review.