The Securities and Exchange Commission recently charged two hedge fund managers and a former government official with insider trading in a scheme that brought them nearly $32 million and charged a Connecticut man with bilking women he met on a dating site.
In addition, the agency won settlements from a former consultant to two China-based private equity firms in an insider trading case, from two municipal advisory firms and their executives for deceptive business practices and from a private fund administrator who was charged with gatekeeper failures.
SEC: Accused Scammer Used Dating Site to Find Victims
A Connecticut man has been charged with fraud by the SEC and his assets have been frozen after the agency said he misled people into investing in his company but then took their money for his personal use. His victims include several women he met through an online dating website.
According to the SEC, Thomas Connerton told investors that his company Safety Technologies LLC was developing a material to make surgical gloves better resistant to cuts or punctures. He claimed that several major glove manufacturers wanted the technology and that Safety Technologies was on the brink of imminent deals that would result in large payouts for investors in his company.
But no deals have ever been close to materializing, and Connerton has emptied the company’s bank account by writing a series of checks to himself and using investor funds for his own expenses.
Among those expenses was $20,000 for an engagement ring for his latest online date-turned-investor. There are more than 50 investors in Safety Technologies, including six women Connerton met through online dating and 14 others who are family or friends of those women.
Connerton not only failed to comply with the requirements for private offerings exempt from registration under the federal securities laws, he is also not registered to sell investments.
The SEC seeks a permanent injunction, as well as the return of ill-gotten gains plus interest and a penalty.
Hedge Fund Managers, Former FDA Official Charged With Insider Trading
Hedge fund managers Sanjay Valvani and Christopher Plaford have been charged separately by the SEC with insider trading on information that came from former government official Gordon Johnston, who also faces charges.
In parallel actions, the U.S. Attorney’s Office for the Southern District of New York has announced criminal charges.
According to the SEC, Valvani received confidential, nonpublic information from Johnston, who worked at the Food and Drug Administration for a dozen years and remained in close contact with former colleagues while working for a trade association representing generic drug manufacturers and distributors.
Johnston hid his separate role as a hedge fund consultant, getting confidential information about anticipated FDA approvals for companies to produce enoxaparin, a generic version of the anti-clotting drug Lovenox. He then passed along to Valvani the details of his conversations with FDA personnel, including a close friend he mentored during his time at the agency.
Valvani then traded in advance of public announcements concerning FDA approvals for such companies as Momenta Pharmaceuticals, Watson Pharmaceuticals and Amphastar Pharmaceuticals.
But Valvani didn’t stop there, the SEC says; he tipped fellow hedge fund manager Christopher Plaford, who not only used the information from Valvani but also traded on other data he received confidentially from a former Centers for Medicare and Medicaid Services official about an impending cut to Medicare reimbursement rates for certain home health services.
Plaford allegedly made approximately $300,000 by trading based on inside information in hedge funds he managed. He has cooperated with the SEC’s investigation.
A third hedge fund manager working at the same investment advisory firm as Valvani and Plaford was charged with falsely inflating assets in portfolios he managed. A separate SEC complaint against Stefan Lumiere alleges that he and Plaford falsely inflated the value of securities held by a hedge fund advised by their firm.
For an 18-month period, Lumiere used sham broker quotes to mismark as many as 28 securities per month, surreptitiously passing his desired prices along to brokers via his personal cell phone or a flash drive delivered by a courier. The fund consequently reported artificially inflated returns and monthly net asset values, and paid out more than $5.9 million in inflated management and performance fees to its investment advisor.
The SEC seeks disgorgement of ill-gotten gains plus interest and penalties as well as permanent injunctions against future violations. The investigation is continuing.
Consultant to China-Based Private Equity Firms Fined by SEC
Guolin Ma, a former consultant to two China-based private equity firms, has agreed to settle SEC insider trading charges.
According to the agency, Ma traded on confidential information he obtained while advising the two firms as they pursued a buyout of Silicon Valley-based OmniVision Technologies, a maker of optical semiconductor devices. Ma, an optical physicist who primarily resides in China, attended key meetings and performed technical due diligence related to the potential acquisition of OmniVision, and he received timeline and strategy documents from the firms.
One of the firms he advised joined a group of Chinese investment firms in making a bid to buy OmniVision. On the basis of nonpublic information, Ma ten stockpiled 39,373 shares of OmniVision stock through a series of purchases in April and May 2014. OmniVision’s stock price rose 15% when the proposed acquisition was publicly announced in August 2014, bringing Ma $367,387 in illegal profits.
Without admitting or denying the SEC’s charges, Ma has agreed to pay disgorgement of $367,387 plus interest of $21,986 and a penalty of $367,387. The settlement is subject to court approval.
SEC Fines Muni Advisors for Deceiving Calif. School Districts
Two California-based municipal advisory firms and their executives have agreed to settle charges that they used deceptive practices when soliciting the business of five California school districts.
According to the agency, while School Business Consulting Inc. was advising the school districts about their hiring process for financial professionals, it was simultaneously retained by Keygent LLC, which was seeking the municipal advisory business of the same school districts.
Without permission, School Business Consulting shared confidential information with Keygent, including questions to be asked in Keygent’s interviews with the school districts and details of competitors’ proposals including their fees. The school districts were unaware that Keygent had the benefit of these confidential details throughout the hiring process. Keygent ultimately won the municipal advisory contracts.
This is the SEC’s first enforcement action under the municipal advisor antifraud provisions of the Dodd-Frank Act.
School Business Consulting also is charged with failing to register as a municipal advisor.
Without admitting or denying the SEC’s findings, School Business Consulting agreed to a censure and a $30,000 penalty; the firm’s president, Terrance Bradley, agreed to be barred from acting as a municipal advisor and must pay a $20,000 penalty; Keygent agreed to a censure and a $100,000 penalty; and Keygent’s principals Anthony Hsieh and Chet Wang agreed to pay penalties of $30,000 and $20,000, respectively.
SEC Fines Private Fund Administrator for Gatekeeper Failures
Apex Fund Services, which provides administrative services to private funds, has agreed to pay more than $350,000 to settle charges that it failed to heed red flags and correct faulty accounting by two clients.
According to the agency, the firm missed or ignored clear indications of fraud while contracted to keep records and prepare financial statements and investor account statements for funds managed by ClearPath Wealth Management and EquityStar Capital Management. Both clients have since been charged with fraud in SEC enforcement actions.
The SEC said that, with regard to ClearPath and its owner Patrick Churchville, who were charged with fraud last year, Apex failed to act appropriately after detecting undisclosed brokerage and bank accounts, undisclosed margin and loan agreements, and interseries and interfund transfers made in violation of fund offering documents.
Apex failed to correct previously issued accounting reports and capital statements, and continued to provide materially false reports and statements to ClearPath and the funds’ independent auditor. ClearPath then used those false reports and statements to communicate financial positions and performance to the ClearPath funds’ investors.
With regard to EquityStar and its owner Steven Zoernack, who were charged in March, the SEC said that Apex accounted for more than $1 million in undisclosed withdrawals by Zoernack from the EquityStar funds as receivables owed to the funds, despite no evidence that Zoernack was able or willing to repay the withdrawals.
While Apex confronted Zoernack about the withdrawals and concluded he was unlikely to repay the funds, it still did not properly account for his withdrawals — which then grew to more than half of the net asset value of one fund, and more than a quarter of the other. Instead, Apex sent monthly account statements to investors that it knew or should have known materially overstated the investors’ true holdings in the funds.
Without admitting or denying the SEC’s findings, Apex agreed to retain an independent consultant and pay a total of $352,449, including disgorgement of $96,800 plus interest of $8,813 and a penalty of $75,000, for its role in the ClearPath fraud, as well as disgorgement of $89,050 plus interest of $7,786 and a penalty of $75,000 for its role in the EquityStar fraud.
— Check out Court of Appeals Affirms SEC’s Reg A+, Rejecting States’ Arguments on ThinkAdvisor.