The Securities and Exchange Commission has charged a father and son for covering up a $1.1 million insider trading scheme in the guise of golf-related messages and also filed charges against a for-profit education company, ITT Educational Services, and two of its executives for fraud.
Among other recent enforcement actions were censures and fines from the Financial Industry Regulatory Authority for a firm that failed to stay on top of anti-money laundering requirements and for another firm that not only had AML failures, but helped unregistered broker-dealers operate.
Father and Son Used Golf to Cover Insider Trading Scheme
The SEC has charged Sean Stewart and his father, Robert Stewart, with pulling off a $1.1 million serial insider trading scheme after the pair passed along tips of key nonpublic information in coded email messages disguised as discussions about golf.
According to the agency, Sean Stewart, currently a managing director at a prominent investment bank, routinely tipped his father with confidential information about future mergers and acquisitions involving clients of two investment banks where he has worked during the past few years.
The elder Stewart, a certified public accountant and CFO of a technology company, cashed in on the tips by placing and directing highly profitable securities trades ahead of at least a half-dozen merger and acquisition announcements. In four years, the pair brought in approximately $1.1 million this way.
Robert Stewart even brought in a trading partner to try to obscure the illegal trading and the connection to his son as the source of the tips. Trades were conducted in the partner’s account, and to avoid a clear paper trail, the elder Stewart got payoffs via small cash payments. The trades were also spread over numerous stock options series to try to avoid raising red flags with regulators.
In addition, Robert and his trading buddy tried in other ways to cover up their activities—they mainly met in person, or used coded email messages to discuss the scheme and trading plans. Some of their attempts to disguise trade tips as golf conversations included “saw local story about high cost of golf reservations since a foreign company purchased all- even more expensive than imagined” and “might have an opportunity to play golf- but would need to book the reservation as soon as the office opens Tuesday morning.”
The SEC’s investigation is ongoing, and in a parallel action, the U.S. Attorney’s Office for the Southern District of New York has announced criminal charges against the Stewarts.
For-Profit Education Company, Execs Charged by SEC with Fraud
ITT Educational Services Inc.; its CEO, Kevin Modany; and its chief financial officer, Daniel Fitzpatrick were charged with fraud by the SEC after the agency found that the firm and officers fraudulently concealed from ITT’s investors the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed.
According to the agency, ITT formed both of these student loan programs, known as the “PEAKS” and “CUSO” programs, to provide off-balance-sheet loans for ITT’s students following the collapse of the private student loan market. To convince others to finance these risky loans, ITT provided a guarantee that limited any risk of loss from the student loan pools.
However, the underlying loan pools had performed so abysmally by 2012 that ITT’s guarantee obligations were triggered and began to balloon. Instead of leveling with investors that the guarantees were likely to cost the company hundreds of millions of dollars in payouts, ITT and its management jumped through hoops to make it look as if ITT’s exposure to these programs was much more limited.
For instance, ITT regularly made secret payments on delinquent student borrower accounts to temporarily keep PEAKS loans from defaulting and triggering tens of millions of dollars of guarantee payments. ITT also netted its anticipated guarantee payments against recoveries it projected for many years later, but it failed to disclose either that it had done so or what effect the action would have in the near term on its cash situation. In addition, ITT failed to consolidate the PEAKS program in ITT’s financial statements despite ITT’s control over the economic performance of the program.
To top it off, ITT and the executives also deceived ITT’s auditor.
However, over the course of 2014 as the truth began to surface about the consequences of ITT’s practices and the size of the guarantee payments it would have to make, ITT’s stock price lost about two-thirds of its value. Trading Firm Censured, Fined by FINRA on AML Failures
FINRA censured Cobra Trading Inc. and fined the firm $150,000 after finding that it failed to adequately implement anti-money laundering policies and procedures.
According to the agency, the firm neither identified nor pursued additional due diligence on potentially suspicious activity and AML red flags while conducting transactional reviews in client accounts.
One failure led to another, as that lack of additional due diligence meant the firm failed to find negative news articles concerning a customer’s role in securities fraud charges filed by the SEC against a customer who was quickly selling off low-priced securities and transferring the proceeds offshore.
It also did not uncover a range of other suspicious activity, including wire transfers sent for no apparent business reason to a geographic location known for financial secrecy or considered high risk; the deposit of funds for purchase of a long-term investment that was quickly followed by a transfer of investment proceeds to an offshore account; a customer who had been convicted of, inter alia, securities fraud, the opening of joint accounts when release conditions only permitted the opening of an individual account; and short-selling activity in the account of a customer who was previously associated with a firm that FINRA fined $1 million for illegal short sales.
FINRA also found numerous other violations, including the firm’s failure to follow up on suspicious activity reports (SARs), or exception reports generated by its clearing firm, and did not document any investigation into such activities.
The firm neither admitted nor denied the charges, but consented to the sanctions.
Trading Firm Censured, Fined for Helping Unregistered BDs
Lightspeed Trading LLC was censured by FINRA and fined $250,000 after the agency found the firm not only helped unregistered BDs to operate but failed to implement an AML program to stay on top of transactions and commissions connected to those BDs.
According to the agency, the firm not only knew, or “was reckless in not knowing,” that the three entities were operating as BDs, it helped them out substantially by putting through securities transactions, collecting commissions and then paying out some of those commissions via registered reps who turned them over to the unregistered entities.
In addition, despite red flags and trading alerts surrounding apparent wash trades, spoofing or layering by people affiliated with the unregistered BDs, Lightspeed did not investigate or otherwise pursue AML activities it should have acted on to follow through on the questionable transactions.
The firm neither admitted nor denied the findings, but consented to the sanctions.