Among recent enforcement actions by the SEC and FINRA were an agreement by foreign traders to pay more than $3 million in an insider trading case; the charging of a portfolio manager in another case of insider trading; and the censure and fining of two firms for compliance failures on fail-to-deliver positions and net capital deficiency requrements.
SEC Portfolio Manager Steinberg Charged in SAC-Related Case
Michael Steinberg, a portfolio manager at New York-based hedge fund advisory firm Sigma Capital Management, has been charged by the SEC with insider trading in connection with information he had in advance of quarterly earnings announcements by Dell (DELL) and NVidia Corp. (NVDA). Criminal charges have also been filed against him.
According to the SEC, Steinberg received illegal tips from Jon Horvath, an analyst who reported to him at Sigma Capital, an affiliate of SAC Capital Advisors. He then used that information, from at least four quarterly earnings announcements in 2008 and 2009, to help hedge funds managed by Sigma Capital and SAC to generate more than $6 million in profits and avoided losses.
"Steinberg essentially got an advance copy of Dell and Nvidia's quarterly earnings announcements, allowing him to trade on tomorrow's news today," said George Canellos, acting director of the SEC's Division of Enforcement.
Horvath, who was charged last year for his part in the scheme, along with a number of other hedge fund managers and analysts, provided advance information to Steinberg and another portfolio manager. In one instance, Steinberg managed to make more than $3 million for the hedge funds on the information; in another, which predicted poor earnings results for Dell, he and the other manager took action; Steinberg closed out a short position in Dell and made a $1 million profit for the Sigma Capital hedge fund, and the other manager sold off Dell holdings to avoid over $3 million in losses.
The SEC’s investigation is continuing.
Read SEC Enforcement Roundup: CR Intrinsic Slapped With Record Insider Trading Fine on AdvisorOne.
Foreign Traders to Pay $3.3 Million in Nexen Insider Trading
A Chinese trader and his wife, whose assets were frozen last year in the case of insider trading of Nexen (NXY), an energy company, have agreed to pay more than $3.3 million to settle charges brought by the SEC.
In July, the couple’s assets, along with other accounts in Hong Kong and Singapore, were held by an emergency freeze order after suspicious trading in Nexen stock was noticed. Nexen was to be acquired by the Chinese oil giant CNOOC (CEO).
According to the SEC at the time, Hong Kong-based firm Well Advantage Limited and other unknown traders purchased Nexen stock based on confidential details about the acquisition. The SEC’s investigation has identified Ren Feng and his wife, Zeng Huiyu, as previously unknown traders charged in the complaint, as well as Ren’s private investment company, CT Prime Assets Limited, and four of Zeng’s brokerage customers, for whom she traded. They made a combined $2.3 million in illegal profits from Nexen stock trades made by Ren and Zeng.
In October the SEC and Well Advantage reached a settlement that required the latter to pay more than $14.2 million. The proposed settlement with Ren, Zeng and the others must still be approved by the court. Ren and CT Prime have agreed to jointly pay disgorgement of ill-gotten gains of $839,714.57 plus a penalty of $839,714.57; Zeng agreed to pay disgorgement of ill-gotten gains of $202,030.22 plus a penalty of $202,030.22.
Zeng’s brokerage customers have also reached settlements. Wong Chi Yu and her company, Giant East Investments Limited, agreed to jointly pay disgorgement of $641,057.94. Wang Wei agreed to pay disgorgement of $137,369.56. Wang Zhi Hua agreed to pay disgorgement of $466,169.15.
The defendants neither admit nor deny the charges; the investigation is continuing.
FINRA Fines, Censures Firm on Fail-to-Deliver Positions
Mesirow Financial was censured and fined $100,000 by FINRA on supervisory failures, and on findings that it did not close fail-to-deliver positions that it had at a registered clearing agency by the required time.
The firm neither admitted nor denied findings that it had not purchased securities of like kind and quality to satisfy fail-to-deliver positions in the time required. In the case of two securities, it had accepted short-sale orders from another person, or effected short sales for its own account, but had not first borrowed or made arrangements to borrow the securities, nor did it clear its fail-to-deliver positions on time.
It also failed to deliver a security on time in the case of an order marked long, even though it should have known the sale would occur. In addition, it was cited for WSPs that did not meet minimum requirements.
FINRA fined StockCross Financial Services $100,000 and censured it for filing inaccurate Financial and Operational Combined Uniform Single (FOCUS) reports with the SEC and FINRA.
According to FINRA’s findings, which the firm neither admitted nor denied, Part II of the FOCUS report indicated net capital of $16,173,033, as well as the firm’s computation of its net capital. As a market maker, the firm had a $1 million net capital requirement, and the report indicated that it calculated its excess net capital to be $15,173,033.
FINRA’s Department of Risk Oversight and Operational Regulation (ROOR) conducted a financial/operational and sales practice examination, and also reviewed the firm’s compliance with net capital and related rules. In its report, ROOR indicated that the firm was not in compliance because it had failed to take a required concentration deduction on the aggregate value of CD positions it held at nine banks that exceeded 30% of its tentative net capital of $5,811,390. As a result, instead of having excess net capital, the firm actually had a net capital deficiency of $4,699,392, once a deduction of $19,872,425 that it had failed to take was accounted for.
The firm failed to take the required deductions for four months, resulting in four erroneous FOCUS reports. The firm has since filed amended FOCUS reports with the correct information.