More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- 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.
Among recent enforcement actions by the SEC were charges against the film company Lions Gate for disclosure failures in its efforts to thwart a hostile takeover bid; an emergency asset freeze against the promoter of a microcap stock scalping scheme; charges against a CR Intrinsic analyst for insider trading; and charges against a stockbroker and the managing clerk at a law firm for their insider trading scheme.
Stockbroker, Law Firm Managing Clerk Charged in $5.6 Million Insider Trading Scheme
Stockbroker Vladimir Eydelman and Steven Metro, the managing clerk at law firm Simpson Thacher & Bartlett in New York, were charged by the SEC in an insider trading scheme that brought in $5.6 million.
Metro obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm’s computer system. He then tipped a middleman, who was a friend of both Metro and Eydelman, during in-person meetings at a New York City coffee shop. The middleman later met Eydelman, who was his stockbroker, near the clock and information booth in Grand Central Terminal, where he would pass along the information via a post-it note or napkin with the relevant ticker symbol. In a futilely dramatic measure, the middleman would then chew up and sometimes even eat the note or napkin.
The scheme began over Sirius XM Radio stock, which the middleman owned. In early February 2009, the middleman was worried about his holdings, concerned that Sirius could go bankrupt. Metro told him not to worry; he’d seen confidential nonpublic information at the law firm that Liberty Media Corp. planned to invest more than $500 million in Sirius.
Of course the middleman ran straight to his stockbroker, Eydelman, and told him to buy more Sirius stock. Eydelman, sharing the middleman’s earlier concerns, advised against it, but the middleman told him about the confidential information and its source, and from there on the scheme was off and running.
Metro tipped and Eydelman traded on inside information about 12 more companies as they settled into a routine to cloak their illegal activities. Metro would get the information and pass it to the middleman. The middleman would then meet Eydelman, who was a registered representative at Oppenheimer & Co. before moving to Morgan Stanley in 2012, and show him the appropriate ticker symbol.
Eydelman would then go on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman and other customers. The middleman allocated a portion of his profits for eventual payment back to Metro in exchange for the inside information. Metro also personally traded in advance of at least two deals.
Eydelman traded on inside information in the accounts of more than 50 of his brokerage customers. He earned substantial commissions as a result, and received bonuses from his employers based on his performance driven in large part by the profits garnered through the insider trading scheme. The middleman’s agreement with Metro resulted in more than $168,000 being apportioned to Metro as his share of profits from the insider trading scheme in addition to his profits from personally trading.
The SEC seeks a final judgment ordering Metro and Eydelman to pay disgorgement of their ill-gotten gains plus prejudgment interest and penalties, and permanent injunctions. The investigation is continuing.
SEC Fines Lions Gate for Disclosure Failures in Hostile Takeover Bid
In a plot that might have come from one of its movies, the film company Lions Gate was charged by the SEC with disclosure failures that were an attempt to ward off a hostile takeover of the studio.
Lions Gate agreed to pay $7.5 million and admit wrongdoing to settle the SEC’s charges.
Lions Gate Entertainment Corp. had been the target of a hostile tender offer by a large shareholder who had been locked in a battle for control of the company for at least a year. The shareholder had made several tender offers and acquired more than 37% of Lions Gate’s outstanding stock, but the studio did not believe that a takeover was in the best interests of either the studio or its shareholders.
So in 2010, management came up with a plan to thwart the takeover, putting millions of newly issued company shares in the hands of a management-friendly director. Lions Gate never alerted its shareholders to the motivation behind its actions, saying instead that the maneuvers were intended to reduce the studio’s debt and were part of a previously announced strategy, as well as claiming that the transactions giving the director control of the shares had not been prearranged.
However, management had announced no such strategy for debt reduction, and putting the shares into the director’s control had in fact been carefully maneuvered — so carefully, in fact, that the transactions were approved by the company’s board of directors at a midnight board meeting on July 20, 2010, while facing an imminent tender offer from the large shareholder.
Completed in hours, these transactions allowed the friendly director to obtain control of approximately 9% of the company’s outstanding stock, effectively blocking the takeover bid. It was done by exchanging $100 million in notes from a holder for new notes convertible to stock at a more favorable conversion rate. The note holder then sold the notes to the management-friendly director at a premium, and the director immediately converted the notes to shares.
SEC Freezes Promoter’s Assets in Microcap Stock Scalping Scheme
The SEC charged John Babikian with fraud and obtained an emergency asset freeze against him for his role as a promoter behind a platform of affiliated microcap stock promotion websites.
Babikian used AwesomePennyStocks.com and its related site PennyStocksUniverse.com, collectively APS, to engage in a type of securities fraud known as scalping.
The APS websites sent an email blast to approximately 700,000 people shortly after 2:30 p.m. Eastern time on Feb. 23, 2012, and recommended the penny stock America West Resources Inc. (AWSRQ). The stock was priced low and thinly traded — so thinly, in fact, that in 2011 its trading volume averaged approximately 15,400 shares per day and on the day of the email, not a single share had changed hands. But in the 90 minutes after the email hit, more than 7.8 million shares were traded and the share price hit an all-time high.
Of course, the emails failed to disclose, among other things, that Babikian held more than 1.4 million shares of AWSRQ stock, which he had already positioned and intended to sell immediately through a Swiss bank.
Once the emails had done their job, creating immediate massive increases in both the share price and trading volume of the stock, Babikian used the last 90 minutes of the trading day to dump his shares, bringing in more than $1.9 million. Then he moved his assets, which he holds in the names of alter ego front companies, out of the U.S. The emergency freeze order put a stop to that.
Among the assets frozen by the emergency order are the proceeds of the sale of a fractional interest in an airplane that Babikian had been attempting to have wired to an offshore bank, two homes in the Los Angeles area, and agricultural property in Oregon.
The SEC’s investigation is continuing.
CR Intrinsic Analyst Fined $200,000 on Insider Trading Charge
Ronald Dennis, a former analyst at an affiliate of hedge fund advisory firm SAC Capital Advisors, was charged with insider trading by the SEC based on nonpublic information that he obtained about a pair of technology companies.
According to the SEC, Dennis, of CR Intrinsic Investors, got illegal tips from two friends who were fellow hedge fund analysts and provided him confidential details about impending announcements at Dell Inc. and Foundry Networks.
The illegal tips about Dell’s financial performance came from Jesse Tortora, who was then an analyst at Diamondback Capital. Both Tortora and Diamondback were charged in 2012, along with several other hedge fund managers and analysts, as part of the SEC’s broader investigation into expert networks and the trading activities of hedge funds.
Dennis separately received an illegal tip about the impending acquisition of Foundry from Matthew Teeple, an analyst at a San Francisco-based hedge fund advisory firm. Teeple and two others were SEC targets last year for insider trading in Foundry stock.
Dennis took the tips on Dell and Foundry and prompted illegal trades in both companies’ stock, enabling hedge funds managed by SAC Capital and CR Intrinsic Investors to generate illegal profits of approximately $3.2 million in the case of Dell, meanwhile avoiding significant losses. The Foundry tip brought in about $550,000 in profits when news of Foundry’s impending acquisition became public.
Without admitting or denying the allegations, Dennis has agreed to be barred from the securities industry and pay more than $200,000 to settle the SEC’s charges: $95,351 in disgorgement, $12,632.34 in prejudgment interest, and a $95,351 penalty. The judgment is subject to court approval, and the investigation is continuing.
Check out Former NAPFA Chairman Mark Spangler Sentenced to 16 Years in Prison on ThinkAdvisor.