More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
The Securities and Exchange Commission on Thursday charged a senior portfolio manager at Microsoft Corp. and his friend and business partner with insider trading ahead of company announcements involving Barnes and Noble’s e-reader business and Microsoft’s fourth-quarter earnings announcement.
The SEC alleges that Brian D. Jorgenson, who lives in Lynwood, Wash., obtained confidential information about upcoming company news through his work in Microsoft’s corporate finance and investments division.
Jorgenson tipped Sean T. Stokke of Seattle in advance of the Microsoft announcements, the most recent occurring in October. After Stokke traded on the inside information that Jorgenson provided, the two equally split the illicit profits in their shared brokerage accounts. The two “made joint trading decisions with the goal of generating enough profits to create their own hedge fund,” the SEC said.
In a parallel action, the U.S. Attorney’s Office for the Western District of Washington announced the same day criminal charges against Jorgenson and Stokke.
“Abusing access to Microsoft’s confidential information and generating unlawful trading profits is not a wise or legal business model for starting a hedge fund,” said Daniel Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit and director of the SEC’s Philadelphia Regional Office, in a statement. “We thwarted the misguided plans of Jorgenson and Stokke as they sought to illegally profit at others’ expense.”
According to the SEC’s complaint filed in U.S. District Court for the Western District of Washington, Jorgenson and Stokke made a combined $393,125 in illicit profits in their scheme, which began in April 2012.
The SEC alleges that Stokke first traded in advance of a public announcement that Microsoft intended to invest $300 million in Barnes & Noble’s Nook e-reader. “Jorgenson learned of the impending transaction after his department became involved in the financing aspects of the deal. Jorgenson tipped Stokke so he could purchase approximately $14,000 worth of call options on Barnes & Noble common stock,” the SEC says. “Following a joint public announcement on April 30, Barnes & Noble’s stock price closed at $20.75 per share, a 51.68% increase from the previous day. Jorgenson and Stokke made nearly $185,000 in ill-gotten trading profits.”
The SEC alleges that Stokke later traded in advance of Microsoft’s fourth-quarter earnings announcement in July.
As part of his duties at Microsoft, Jorgenson prepared a written analysis of how the market would react to the negative news that Microsoft’s fourth-quarter earnings were more than 11% below consensus estimates. He estimated that Microsoft’s stock price would decline by at least 6%. “Jorgenson tipped this confidential information to Stokke, who purchased almost $50,000 worth of Microsoft options. After Microsoft’s announcement on July 18, its stock price declined more than 11% the next day from $35.44 to $31.40 per share. Jorgenson and Stokke realized more than $195,000 in illicit profits,” the SEC says.
According to the SEC’s complaint, Stokke traded in advance of another Microsoft announcement on Oct. 24.
“Jorgenson was aware that the company would be announcing first-quarter 2014 earnings that were more than 14% higher than consensus estimates. Rather than purchase Microsoft securities directly, Jorgenson and Stokke purchased more than $45,000 worth of call options on an exchange-traded fund in which Microsoft comprised more than 8% of the fund’s holdings,” the SEC says. Following the announcement, Microsoft’s share price increased nearly 6% and the price of the ETF increased 0.51%. Jorgenson and Stokke made approximately $13,000 in illegal trading profits.
Jorgenson and Stokke are charged with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, both directly and pursuant to 20(d) of the Exchange Act. The SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and financial penalties against Jorgenson and Stokke as well as an officer-and-director bar against Jorgenson.
Check out SEC Levied Record $3.4B in Fines in 2013 on ThinkAdvisor.