More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
Among recent SEC actions were the negotiation of a $5.2 million settlement from a trader in Bangkok, Thailand, on insider trading charges; charges against the former head of investor relations for First Solar for fair disclosure violations; and an emergency asset freeze in a prime bank investment scheme.
Bangkok Trader to Settle Smithfield Insider Trading Charges for $5.2 Million
Trader Badin Rungruangnavarat, whose U.S. brokerage account assets were frozen via an emergency order in June, has agreed to pay $5.2 million to settle charges that he traded on inside information ahead of the public announcement of the proposed acquisition of Smithfield Foods by a Chinese firm.
On June 5, the SEC filed a complaint against Badin for making more than $3 million in illicit profits just days earlier by insider trading in Smithfield securities. In the week before a May 29 public announcement of the planned sale of Smithfield Foods to Shuanghui International Holdings, Badin had bought up out-of-the-money Smithfield call options and single-stock futures contracts.
He relied on a number of possible sources of nonpublic information. Among those sources was an associate director of an investment bank whom he was friends with via Facebook. The friend’s bank was acting on behalf of a different company considering a Smithfield acquisition.
While neither admitting nor denying the SEC’s allegations, Badin has agreed to pay $3.2 million in disgorgement and a $2 million penalty for his actions. The asset freeze made it possible to prevent him from moving the money out of the country.
Prime Bank Investment Scheme Ground to a Halt by SEC
The SEC has charged a Miami-based attorney and other alleged perpetrators of a prime bank investment scheme, and has also obtained an emergency asset freeze against them.
In the scheme, which promised exorbitant returns from a nonexistent international trading program, attorney Bernard Butts Jr. acted as an escrow agent to enable Fotios Geivelis Jr. and his phony financial services firm, Worldwide Funding III, to defraud approximately 45 investors out of more than $3.5 million they invested in the fake trading program.
Geivelis lives in Tampa; he used the alias “Frank Anastasio” with investors, telling them that they’d get returns of at least 6.6 million euros ($8.7 million) within 15 to 45 business days on an initial investment of $60,000 to $90,000 in U.S. dollars. That was supposed to be followed by a weekly return of approximately 14% for 40 to 42 weeks.
Geivelis and Butts promised investors that their money would stay in escrow with Butts until he got proof from the receiving bank that a $10 million euro SBLC had been deposited into the securities trading program to generate profits for investors.
Not so, of course. There was no trading program, and no SBLC was ever sought. Instead, Butts has almost immediately distributed those investor funds to enrich himself, sales agents, and Geivelis, who has blown his part on such personal expenses as travel and gambling. Butts and Geivelis each took about 45%, and paid about 10% to the sales agents.
The three sales agents have also been charged: Douglas Anisky of Delray Beach, Fla.; James Baggs of Lake Forest, Calif.; and Sidney Banner of Delray Beach, Fla., and his company Express Commercial Capital.
The SEC seeks disgorgement of ill-gotten gains, financial penalties and permanent injunctions, and the complaint names several relief defendants: Butts’ law firm; his wife, Margaret Hering; and Butts Holding Corp., as well as two other companies with ties to Geivelis (Global Worldwide Funding Ventures) and Anisky (PW Consulting Group). The investigation is continuing.
Former First Solar VP Charged With Unfair Disclosure
Lawrence Polizzotto, a former vice president at First Solar, a Tempe, Ariz.-based solar energy company, was charged by the SEC with violating rules requiring fair disclosure of information when he told certain analysts and investors the company would not be getting a government loan it was expecting.
Polizzotto violated Regulation FD, which requires material nonpublic information to be disclosed broadly and not selectively, when in phone conversations with some analysts and investors he indicated that the company was unlikely to get a U.S. Department of Energy loan guarantee that had been anticipated. When the company broke the news publicly the next morning in a press release, its stock price dropped 6%.
At an investor conference on Sept. 13, 2011, Polizzotto was present when First Solar’s then-CEO publicly indicated confidence that the company would get three loan guarantees that totaled approximately $4.5 billion; the Energy Department had provided conditional commitments for the guarantees. Two days later, Polizzotto and some other executives found out that at least one of those guarantees would not be forthcoming.
After that, Polizzotto, one of First Solar’s in-house lawyers, and some other employees discussed the manner and timing the company should use to make the news public. The company lawyer specifically said that, when the company was officially notified by the Energy Department, “we would not have to issue a press release or post something to our website the same day. We would, though, be restricted by Regulation FD in any [sic] answering questions asked by analysts, investors, etc. until such time that we do issue a press release or post to our website…”
Polizzotto, however, had other ideas. In several one-on-one conversations with approximately 20 sell-side analysts and institutional investors on Sept. 21, 2011, he spread the news, the SEC says. That was just a day after a congressional committee sent a letter to the Energy Department inquiring about its loan guarantee program and the status of conditional commitments, including three involving First Solar.
The solar industry was worried about the congressional inquiry’s possible effects on the Energy Department, including curtailing the Department’s ability to honor its conditional commitments. Analysts were issuing research reports about the inquiry, which meant that analysts and investors began calling Polizzotto.
Even though he knew the lawyer had said the company couldn’t say anything prior to a broad release of the news, and the company had not yet done so, Polizzotto managed to convey in these phone conversations that loss of one of the loan guarantees was a sure thing. While he stressed that it was likely the company would still get the other two, he tipped off those he spoke with—both analysts and institutional investors—to the looming disappearance of the third.
He also told a subordinate to address the subject the same way he had, and pushed the envelope with at least one analyst and one institutional investor by telling them that if they took a conservative view of the issue, they would assume one loan guarantee was lost.
Polizzotto, while neither admitting nor denying the charges, has agreed to pay a $50,000 penalty. First Solar has not been charged in the matter; not only had the firm taken extra care via a disclosure committee to honor Regulation FD, when it learned what Polizzotto had done, it rushed a press release out prior to the market’s opening the next morning, to make the news broadly public, and called in the SEC itself. It not only cooperated with the agency, but bolstered its compliance training and took other actions to avoid future instances of such conduct.
-- Check out last week's enforcement roundup: SEC, FINRA Enforcement: Money Manager Charged in Free-Riding Scheme