More On Legal & Compliancefrom The Advisor's Professional Library
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
- 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.
Late last week, the Securities and Exchange Commission (SEC) levied two separate insider trading enforcement actions—one against a former senior executive at a Silicon Valley technology company for illegally tipping convicted hedge fund manager Raj Rajaratnam with nonpublic information, and another against an insurance company CEO for relaying confidential information he obtained in advance of a private investment firm acquiring a significant stake in a Denver-based oil and gas company.
In the first case, the SEC alleges that Kris Chellam tipped Rajaratnam in December 2006 with confidential details from internal company reports indicating that Xilinx Inc. would fall short of revenue projections it had previously made publicly. The tip enabled Rajaratnam to engage in short selling of Xilinx stock to illicitly benefit the Galleon funds, making nearly $1 million in illicit profits.
According to the SEC, "Chellam tipped Rajaratnam, who was a close friend, at a time when Chellam had his own substantial investment in Galleon funds and was in discussions with Rajaratnam about prospective employment at Galleon. Chellam was hired at Galleon in May 2007."
Chellam, who lives in Saratoga, Calif., has agreed to pay more than $1.75 million to settle the SEC’s charges. The settlement, the SEC says, is subject to court approval.
“Chellam was entrusted with sensitive company information that he divulged to Rajaratnam knowing full well that Rajaratnam would trade on it,” said Sanjay Wadhwa, associate director of the SEC’s New York Regional Office and Deputy Chief of the Enforcement Division’s Market Abuse Unit. “Corporate executives who exploit company confidences for personal gain will ultimately be held accountable for their illegal acts.”
The SEC notes that since October 2009, the agency has filed a substantial number of insider trading actions, charging more than 400 individuals and entities. The defendants in these actions are alleged to have made more than $600 million in illicit gains comprised of profits and the avoidance of losses.
The SEC says that it has now charged 32 defendants in its Galleon-related enforcement actions, which have exposed widespread and repeated insider trading at numerous hedge funds and by other traders, investment professionals, and corporate insiders throughout the country. The alleged insider trading has occurred in the securities of more than 15 companies for illicit profits of about $93 million.
In the second case, the SEC alleges that Michael Van Gilder learned from a Delta Petroleum Corp. insider that Beverly Hills-based Tracinda—which has previously owned large portions of companies such as MGM Resorts International, General Motors, and Ford Motor Co.—was planning to acquire a 35% stake in Delta Petroleum for $684 million.
“Van Gilder subsequently purchased Delta Petroleum stock and highly speculative options contracts," the SEC said. "He tipped several others, encouraging them to do the same, including a pair of relatives via an e-mail with the subject line 'Xmas present.' After Tracinda’s investment was publicly announced, Delta Petroleum’s stock price shot up by almost 20%. Van Gilder and his tippees made more than $161,000 in illegal trading profits.”
The U.S. Attorney’s Office for the District of Colorado announced the same day a parallel criminal action against Van Gilder.
“Michael Van Gilder crossed the line when he took advantage of highly confidential corporate information to make trades and reap illicit profits,” said Sanjay Wadhwa, deputy chief of the SEC Enforcement Division’s Market Abuse Unit and Associate Director of the New York Regional Office. “He may have thought that he could get away with it, but he is faced today with the consequences of his actions.”
According to the SEC’s complaint filed in federal court in Denver, Van Gilder is the CEO of Van Gilder Insurance Co. He obtained the confidential information about Tracinda’s proposed investment and loaded up on Delta Petroleum stock and options in November and December 2007, and then tipped his broker, a co-worker and relatives.