An Atlanta insider trading case has brought prison terms for two former executives at Carter’s and for a hedge fund manager.
In addition, the SEC charged five traders with short selling and a school district with misleading bond investors, and fined an RIA for breach of fiduciary duty.
SEC Fines SignalPoint for Fiduciary Duty Breach
Springfield, Missouri-based SignalPoint Asset Management LLC (SAM) was the target of a cease-and-desist order sought by the SEC after failing to disclose conflicts of interest to clients. The firm and its principals were also fined and subject to sanctions.
According to the agency, John Handy Jr., Jonathan Timson and Dennis Walker, principals of the firm, provided brokerage and advisory services as both registered representatives and investment advisor representatives of a dually registered broker-dealer and investment advisor. During 2007 and early 2008, the three tried to get permission from the dual registrant to form and own a separate investment advisory firm, but were denied.
Regardless, in August 2008, the three went ahead and formed SAM, but when they advised clients to invest with their new firm they neglected to mention the fact that they controlled it, and that there were conflicts of interest that arose from their capitalization of and potential receipt of profits from it.
SAM also failed to disclose to its clients who its owners were, and also failed to properly identify them on the firm’s Form ADV. Michael J. Orzel, its comptroller and SAM’s chief compliance officer from 2008 onward, was responsible for drafting and filing most of the firm’s Forms ADV.
The three principals had formed Walnut Capital Management (WCM), which they described as a wealth management firm, in March of 2007. They attempted to create, according to the SEC, a hybrid model — a “money management firm that enabled them to process both commission-based business as registered representatives and fee-based business as IARs through the formation of a[n] … RIA.”
Toward the end of 2006, they had negotiated with a number of broker-dealers, including the dual registrant, about their hybrid model. At the time the dual registrant told them they couldn’t register WCM as an RIA because the dual registrant didn’t support that model, but the principals went ahead and “associate[d] themselves with the dual registrant as registered representatives and IARs, and established WCM as a branch office of the dual registrant.”
Subsequently they asked again about registering WCM as an RIA, and were again denied. So they asked about creating a separate RIA, and were told that the dual registrant prohibited them from “assuming an ownership interest” in such an RIA.
When they formed SAM, however, they not only provided capital but ran the firm — facts that they failed to disclose to clients or in the firm’s ADVs, and definitely assuming an ownership interest.
Sanctions imposed by the SEC include the notification of clients of the circumstances surrounding SAM and potential conflicts of interest, as well as cease-and-desist orders. In addition, the three principals are to pay $60,000 each, and Orzel will pay $35,000, all to the U.S. Treasury.
Ex-Carter’s Execs, Hedge Fund Manager Sentenced to Prison for Insider Trading
A criminal case in Atlanta on charges of insider trading has resulted in prison terms for Eric Martin and Richard Posey, two former executives of Carter’s, the children’s clothing company, as well as for Mark Megalli, a former New York hedge fund manager.
Martin, a former vice president of investor relations, started the scheme when he was still at Carter’s. From 2005 to 2009, he passed inside information to a former Wall Street analyst who has cooperated with the investigation but has not been identified.
Martin left Carter’s in 2009, but Posey kept him informed through July 2010. Martin not only passed along the information to the analyst, but also began to act as a consultant for investment firms beginning in September 2009. Level Global was one of these.
Megalli, for his part, made $3 million from the use of Martin’s information for trading.
Martin got two years for his part in the scheme. He pleaded guilty in 2012 to conspiracy to commit securities fraud and wire fraud. Posey, a former vice president of operations, got a year and three months. He was the tipper who provided information to Martin once the latter left the company, and pleaded guilty in June 2013.
Megalli was a former fund manager at Level Global Investors. He, along with other hedge fund investors, got tips from Martin. He pleaded guilty last November and was sentenced to a year and a day in prison.
The three must also pay restitution. Martin is on the hook for $950,000; Posey must pay $750,000; and Megalli, $50,000.