Charges of insider trading in a secondary stock offering, accounting violations, insider trading around an acquisition and efforts by a phony company president to push a fake penny-stock investment were among enforcement actions taken by the SEC, while FINRA censured and fined a firm for a registered representative’s unsuitable and excessive trading in client accounts.
CEO Charged with Insider Trading in Secondary Stock Offering
The chairman and CEO of a Santa Ana, Calif.-based computer storage device company was charged by the SEC with insider trading on shares of his own company’s stock in a scheme that had netted him and his brother $134 million apiece.
The agency alleged that Manouchehr Moshayedi intended to take advantage of a dramatically upward trend in the stock price of STEC by deciding to sell a significant portion of his stock holdings as well as shares owned by his brother, a company co-founder. The sale was to be a secondary offering, set to coincide with the release of the company’s financial results for the second quarter of 2009 and its revenue guidance for Q3.
However, the SEC alleged that Moshayedi found out shortly before the offering was to take place that his company’s largest customer, EMC Corp., had changed its mind. EMC, which had agreed to buy $120 million worth of STEC’s flagship flash memory product, a solid-state drive (SSD) called ZeusIOPS, in the third and fourth quarters of 2009, no longer intended to do so. Instead, EMC’s Q3 demand for the SSD was far lower than STEC had anticipated, and EMC also told Moshayedi that it would never again enter into a similar agreement with STEC.
Instead of informing investors abut the change in projected growth, Moshayedi kept the information to himself and responded to EMC by concocting a secret side deal so that the company would make its Q3 numbers. He also sold the 9 million shares he had intended to, making a hefty profit.
The SEC seeks a final judgment ordering Moshayedi to disgorge his own ill-gotten gains and the trading profits of his brother Mehrdad Mark Moshayedi, pay prejudgment interest and financial penalties, and be permanently barred from future violations and from serving as an officer and director of any registered public company.
SEC Penalizes Consulting Firm, Execs Nearly $1.3 Million on Accounting Violations
Without admitting or denying the SEC’s findings, Huron Consulting Group, a provider of financial and operational consulting services to clients in various industries, former Chief Financial Officer Gary Burge and former controller and Chief Accounting Officer Wayne Lipski agreed to settle charges by the agency over accounting violations that overstated the company’s income for multiple years.
Huron agreed to pay a $1 million penalty. Burge and Lipski agreed to pay a total of nearly $300,000 in disgorgement and penalties to settle the charges.
The SEC found that Huron failed to properly record redistributions of sales proceeds by the selling shareholders of four firms acquired by Huron. The selling shareholders redistributed the money to employees at those firms who stayed on to work at Huron, as well as to other Huron employees and themselves. Because the redistributions were contingent on the employees’ continued employment with Huron, based on the achievement of personal performance measures, or not clearly for a purpose other than compensation, Huron should have recorded the redistributions as compensation expense in its financial statements. By failing to do so, Huron overstated its pretax income to the public. The decisions were overseen by Burge and Lipski.
Huron’s financial statements for 2006, 2007, 2008 and the first quarter of 2009 were materially misstated as a result of these accounting failures. In August 2009, Huron restated those results, thus reducing its net income by approximately $56 million.
Too Friendly: Insider Trading Charges Brought on Company Acquisition
Ladislav “Larry” Schvacho, close friend of Larry L. Enterline, CEO of Comsys IT Partners, a Houston-based employment services company, was charged by the SEC with taking advantage of his friendship with Enterline to engage in insider trading around the acquisition of Comsys by another staffing firm. The SEC acknowledged the assistance of FINRA in the matter.
The SEC alleged that Schvacho, who lived in Georgia at the time of his illegal trading, made approximately $511,000 in illicit profits by using inside information to trade around the acquisition of Comsys—nonpublic information he gleaned from his relationship with Enterline while the Comsys CEO called other Comsys executives to discuss the acquisition and through confidential, merger-related documents to which Schvacho had access.