Among recent actions taken by the SEC and FINRA were the breakup of an insider trading ring; Raymond James getting fined and censured; and administrative proceedings over securities law violations by China affiliates of the Big Four accounting firms
SEC Charges Ring of 10 With Insider Trading
The SEC has charged an investment banker who was primarily based in Charlotte, N.C., and nine others involved in an insider trading ring that garnered more than $11 million in illicit profits trading on confidential information about impending mergers. It has also frozen the assets of the traders.
The SEC alleges that John Femenia misused his position at Wells Fargo Securities to obtain material, nonpublic information about four separate merger transactions involving firm clients. Upon learning inside information about an impending deal, Femenia’s first call to set the insider trading ring in motion was typically to his longtime friend Shawn Hegedus, who worked as a registered broker. Femenia and Hegedus illegally tipped other friends who in turn tipped more friends or family members in a ring that spread across five states.
According to the SEC’s complaint filed in U.S. District Court for the Western District of North Carolina, Femenia was based in Wells Fargo’s Charlotte office when most of the misconduct occurred, but later moved and worked in New York where he currently resides.
Femenia’s tippees included his friends Aaron Wens, who lives in Encinatas, Calif., and Matthew Musante, who lives in Miami. Musante tipped his father Anthony Musante, who lives in Melbourne, Fla. Hegedus tipped his girlfriend Danielle Laurenti and his business colleague Roger Williams, who lives in Georgetown, S.C. Williams tipped three of his friends: Frank Burgess, Jr. of Charlotte, James Hayes IV of Charlotte, and Kenneth Raby of Greer, S.C.
According to the SEC’s complaint, the illegal trading occurred from July 2010 to July 2012 and involved the acquisition of ATC Technology Corp. by GENCO Distribution Systems (publicly announced July 19, 2010); the acquisition of Smurfit-Stone Container Corp. by Rock-Tenn Co. (publicly announced Jan. 23, 2011); the acquisition of K-Sea Transportation Partners by Kirby Corp. (publicly announced March 13, 2011); and the acquisition of The Shaw Group by Chicago Bridge & Iron Co. (publicly announced July 30, 2012).
The SEC’s complaint further says that Femenia’s tips enabled profitable trades in the stock and options of the companies being acquired in the deals, and at least one trader provided a portion of his profits to Femenia in exchange for the information. Some downstream tippees also kicked back a portion of their profits.
The SEC charged two companies with ties to Hegedus or Laurenti that were involved in the illegal trading: Coram Real Estate Holdings Inc. and GoldStar P.S. The SEC also charged two others as relief defendants for the purposes of recovering illicit profits that are now in their possession: Femenia’s girlfriend Kristine Lack and Anthony Musante’s wife Christine Musante.
Raymond James Hit for Failure to Safeguard Client Information
Fined $250,000 and censured by FINRA, Raymond James paid the price for failing to adequately protect client personally identifiable information (PII). Without admitting or denying the findings, the firm consented to the measures over the events that followed the use of a firm employee by two branches to build and maintain an online document management system (DMS) for customer records.
The employee later departed the firm, and as a nonaffiliated third party was not approved by the firm to receive customer PII. However, one branch office of the firm provided PII of numerous firm customers to the third party anyway, and a second branch office also provided the third party with PII of customers and their beneficiaries.
FINRA’s findings stated that subsequently, a firm customer complained that her firm account information and PII were available on the Internet. The firm learned that while building and maintaining the DMS, the nonaffiliated third party had inadvertently posted customer PII to the Internet.
Once the firm learned that the customer PII was searchable on the Internet, it immediately contacted the unauthorized third party, who contacted the search engine to remove the customer information. The firm subsequently notified regulators of the incident and notified affected customers and their beneficiaries that their PII had been exposed on the Internet, and offered customers and their beneficiaries free credit monitoring and protection services.
The firm also amended its WSPs in connection with the protection of PII, and conducted mandatory training in the protection of PII to all associated persons, including branch personnel. To date, to the firm’s knowledge, no customer has suffered any instances of identity theft or other actual damages because of the information security breach.
The firm did not have a supervisory system or written procedures in place to ensure that its employees adhered to its policies on the matter. It also failed to establish and maintain adequate supervisory systems and procedures to safeguard against the unauthorized disclosure of PII to nonaffiliated third parties, and failed to provide customers with opt-out notices prior to disclosing nonpublic customer information to a nonaffiliated third party.
Separately, the firm failed to have a supervisory system and written procedures to monitor the dissemination of PII, or to take reasonable steps to prevent the dissemination of PII in its mailings. A firm-approved third-party vendor sent correspondence to customers relating to a cash management account program. To prepare for the mailing, the firm provided the vendor with a list of customers. The vendor printed mailing labels for the envelopes and processed a mailing to 87,000 customer accounts; however, the labels on the envelopes mailed to customers disclosed each customer’s account number along with the customer’s name and address.
Big Four Accounting Affiliates in China Targets of SEC
The SEC has begun administrative proceedings against the China affiliates of the Big Four accounting firms and another large U.S. accounting firm for refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors.