More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
The SEC announced the largest-ever settlement in an insider trading case with CR Intrinsic’s agreement to pay more than $600 million. In another case, a financier claimed to investors that he had an inside track on pre-IPO stock for, among other popular social media firms, Facebook, but instead took the money and used it for personal purposes. The agency also charged a group of “pump-and-dumpers” with market manipulation and went after a Massachusetts-based advisor who was stealing money from his clients. Last but not least was a $1.8 million settlement related to the Galleon insider trading case.
CR Intrinsic to Pay More Than $600 Million for Insider Trading
CR Intrinsic Investors, a hedge fund advisory firm based in Stamford, Conn., has agreed to a record settlement of over $600 million in an insider trading case that was originally filed in November, when the SEC charged the firm with participation in an insider trading scheme that netted it more than $200 million.
Matthew Martoma, one of the fund’s former portfolio managers, was alleged to have gotten insider information from Dr. Sidney Gilman about an Alzheimer’s drug being jointly developed by two pharmaceutical companies. Gilman had been selected by the firms, Elan Corp. and Wyeth, to present final drug trial results to the public; instead he shared data on the clinical trials with Martoma.
News of negative results from Gilman, leaked about two weeks before they were to be made public, allowed the firm to cause several hedge funds to sell more than $960 million in Elan and Wyeth securities in a little more than a week. An amended complaint filed last week included SAC Capital Advisors, an affiliate of CR Intrinsic, and four hedge funds managed by CR Intrinsic and SAC Capital as relief defendants; each of those firms received ill-gotten gains from the scheme that consisted of profits and avoided losses, as well as fees received by SAC Capital.
The record settlement requires CR Intrinsic to pay $274,972,541 in disgorgement, $51,802,381.22 in prejudgment interest and a $274,972,541 penalty. It is subject to court approval, and while it would resolve the charges against CR Intrinsic and the relief defendants, none of whom admit or deny the charges, it does not include a resolution of the case against Martoma. Gilman’s case has already been resolved via a consent judgment.
Financier Charged in Ponzi-type Scheme, Misappropriation of Client Funds
Craig Berkman, a financier masquerading as a sophisticated fund manager, was charged by the SEC with defrauding investors hoping to buy shares of Facebook and other social media companies from before their initial public offerings. The U.S. Attorney’s Office for the Southern District of New York has also announced criminal charges against him.
Berkman, a former Oregon gubernatorial candidate who now lives in Florida, claimed he could get pre-IPO stock in Facebook, LinkedIn, Groupon and Zynga. But when he had investors’ money, he made Ponzi-type payments to earlier investors, paid off bankruptcy claims and covered personal expenses.
John Kern of Charleston, S.C., was also charged. He served as legal counsel to some of Berkman’s companies, and assured worried investors after the Facebook IPO that their money had indeed been used to buy pre-IPO Facebook stock being held for them by unnamed counterparties.
Of course, none of those things happened, although he did use $600,000 to buy a small interest in an unrelated fund that had acquired pre-IPO Facebook stock. Then one of his companies used a forged letter about it to claim it owned almost half a million shares of Facebook. When the fund found out about the forgery, it terminated and liquidated Berkman’s company’s interest, so there was no longer even an indirect interest in Facebook shares.
In 2001, the Oregon Division of Finance and Securities issued a cease-and-desist order against Berkman and fined him $50,000 for offering and selling convertible promissory notes without a brokerage license to Oregon residents. Then, in June 2008, an Oregon jury found him liable in a private action for breach of fiduciary duty, conversion of investor funds and misrepresentation to investors arising from his involvement with a series of purported venture capital funds known as Synectic Ventures. That resulted in a $28 million judgment against him. In March of 2009, Synectic filed an involuntary Chapter 7 bankruptcy petition against him in Florida for his unpaid debts arising from the 2008 court judgment, and the parties to the bankruptcy proceeding reached a settlement with him.But Berkman didn’t use his own money to satisfy the judgments; instead, he used investor money. More than $5.4 million went to the bankruptcy settlement; $4.8 million went to Ponzi-type payments to earlier investors in the pre-IPO debacle, with him claiming that it was money made on their investments; and about $1.6 million went to his personal expenses—travel and dining, as well as big cash withdrawals. Kern also got $300,000.
The investigation is continuing.
A group of Canadian stock promoters, two San Diego attorneys, a Bahamas-based broker-dealer, and other participants were charged by the SEC in an international “pump-and-dump” scheme involving two public U.S. companies, Pacific Blue Energy Corp. and Tradeshow Marketing Co.
According to the SEC, Canadians John Kirk, Benjamin Kirk, Dylan Boyle, James Hinton and their associates misled investors by email, sent by two websites they controlled—Skymark Research and Emerging Stock Report—and by a telephone boiler room scheme to drive up the share prices of the two companies, both microcaps. They made millions when they sold their own shares secretly.
The attorneys, Luis Carrillo and Wade Huettel, were accused of helping the promoters hide their ownership of the stocks; drafting false public filings; and providing misleading legal opinions. Their law firm, Carrillo Huettel, was rewarded with sales proceeds disguised as a loan.
The BD, Gibraltar Global Securities, provided false affidavits and misleading statements that allowed Benjamin Kirk to secretly sell shares of the companies he was promoting, the SEC said. Gibraltar’s president, Warren Davis, was also charged; he was accused of signing misleading representations on behalf of Gibraltar.
The microcap companies were also involved in the scheme. Tradeshow President Luniel de Beer, who served as chairman of Pacific Blue, received more than $330,000 in kickbacks for his actions. In addition, the SEC has alleged that de Beer and Pacific Blue President Joel Franklin made misleading representations and facilitated the promoters’ stock sales. Franklin agreed to settle the charges without admitting or denying the SEC’s allegations.
Also charged were Warren Davis and Carrillo’s father, Dr. Luis Carrillo, for distribution of unregistered shares.
Advisor’s Assets Frozen in Fake Hedge Fund Scheme
Advisor Gregg Caplitz, of Insight Onsite Strategic Management in Wilmington, Mass., has been the target of an asset freeze by the SEC, which alleges he stole client funds by telling them they were investing in a hedge fund. The fund was nonexistent.
According to the agency, Caplitz and his firm brought in at least $1.1 million that, instead of being invested in a hedge fund, was transferred to the firm’s chief investment officer and other members of her family, who spent it on personal expenses. The firm’s SEC filings indicate that it has $100 million in assets under management; the purported hedge fund has no assets at all.
The asset freeze targets not just Caplitz and his firm, but others who received investor money; they have been named as relief defendants so that investor funds in their possession can be recovered.
Caplitz, according to the SEC, didn’t just solicit funds; when clients declined to “invest,” he simply took them. A 20-year client who decided the investment sounded too risky at her age refused to put her money into the nonexistent fund; Caplitz then managed to extricate thousands from her IRA without her knowledge or consent, and had the money transferred to an Insight Onsite Strategic Management bank account.
Once he got his hands on client money, Caplitz transferred control of it to Rosalind Herman, his friend who works at the firm. Client money was also transferred to her sons Brad and Brian Herman, daughter-in-law Charlene Herman, and a company called The Knew Finance Experts. The Hermans, who all live in Las Vegas, own that company. The Hermans used investor money to pay legal bills and other personal expenses at gas stations, drugstores and restaurants.
The SEC seeks a permanent injunction plus disgorgement, prejudgment interest, and a penalty against Caplitz and his firm. The four Hermans and The Knew Finance Experts are named as relief defendants; disgorgement plus prejudgment interest is also sought from them.
$1.8 Million Settlement Reached in Galleon-Related Case
A proposed $1.8 million settlement related to the Galleon Management insider trading case has been approved by Judge Jed Rakoff of the U.S. District Court for the Southern District of New York.
In February 2012, hedge fund manager Douglas Whitman and Whitman Capital had been charged with illegally trading based on material nonpublic information obtained from Raj Rajaratnam’s associate Roomy Khan, who was Whitman's friend and neighbor. Khan passed along to Whitman confidential information about Polycom's fourth-quarter 2005 earnings and Google's Q2 2007 earnings before the data was made public. Whitman Capital’s hedge funds used the information to bring in more than $900,000.
In August, in a parallel criminal case, Whitman was convicted of two counts of conspiracy to commit securities fraud and two counts of securities fraud. In January he was sentenced to two years in prison, followed by one year of supervised release, and ordered to pay forfeiture of $935,306, and a $250,000 criminal fine.
The settlement approved by Rakoff orders Whitman and Whitman Capital to jointly and severally disgorge $935,306, and orders Whitman to pay a civil penalty in the amount of $935,306 (Whitman's civil disgorgement liability will be offset by his obligation to make criminal forfeiture of the same amount). The civil penalty is in addition to the criminal fine that has been assessed. Whitman has also been barred from the securities industry.