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Regulation and Compliance > Litigation

Advisor Charged With Securities Fraud in Insider Trading Scheme  

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What You Need to Know

  • An advisor allegedly used inside information from a friend who worked at a publicly traded company to profit from an upcoming acquisition.
  • The Department of Justice and SEC charged the advisor with securities fraud in separate actions.
  • The SEC also named the advisor's friend as a defendant in its action.

A registered advisor and broker was charged on Tuesday with securities fraud by both the Department of Justice and Securities and Exchange Commission in U.S. District Court for the Northern District of California in Oakland for allegedly trading on nonpublic information.

The Department of Justice said it has charged John Mendes, 39, formerly of Oakland and now a Philadelphia resident, with securities fraud. If convicted, he faces a maximum sentence of 20 years in prison and a fine of $5 million. If convicted, he will also be required to pay restitution.

Mendes had been serving as an advisor or broker for Independent Financial Group but the broker-dealer said Wednesday he was “no longer affiliated” with the firm.

Mendes has been a registered broker since 2008, when he joined MassMutual, according to his report on the Financial Industry Regulatory Authority’s BrokerCheck website. He left that firm in 2010 to join Princor Financial Services, which he left in 2012. Mendes joined Independent Financial Group one year later and is still working with the firm, according to BrokerCheck.

Mendes and the firm did not immediately respond to requests for comment on Wednesday.

In the criminal action by DOJ, Mendes was charged in a federal information that stated he learned nonpublic information from his friend, identified in the information only as “Insider One.” (The friend, however, was identified in the parallel SEC action as Andre Dabbaghian.)

At the time, the friend worked for Granite Construction, a publicly traded construction materials company focused on large public and private infrastructure projects, headquartered in Watsonville, California, according to DOJ.

In 2018, Granite acquired Layne Christensen Co., a water management, construction and drilling company that was based at the time in The Woodlands, Texas, and was publicly traded until the acquisition, DOJ noted. Granite publicly announced an agreement to buy Layne on Feb. 14, 2018.

“Insider One actively worked on the acquisition and learned material non-public information regarding the deal prior to any public disclosure of the potential acquisition,” according to DOJ.

“As a requirement of Insider One’s employment,” he received training in and “agreed to by bound by Granite’s policies and procedures,” which prohibited insider trading and improper disclosure of material nonpublic information, DOJ said.

As part of Insider One’s employment, he “had a duty to maintain the confidentiality of information learned in the course of employment with Granite, including confidential business information regarding potential acquisitions,” according to the information.

The information alleged that from about November 2016 through February 2018, in the course of their friendship, Insider One disclosed information to Mendes about Granite’s potential acquisition of Layne before that information was publicly available.

Mendes had a history of sharing confidences with Insider One, who expected that Mendes would maintain the confidentiality of the nonpublic information, according to DOJ. The information alleged that Mendes breached that duty of confidence and used Insider One’s material nonpublic information to trade Layne’s stock before Granite’s public announcement about its plan to buy Layne.

The information described specific instances of Mendes’ trading based on inside information and alleged that between November 2017 and January 2018, Mendes bought Layne stock and options in accounts in the names of his family members and in at least 10 clients’ accounts, according to DOJ.

All those securities were sold for a profit following the announcement of Granite’s intent to acquire Layne, generating profits of about $242,000, DOJ charged.

Mendes was expected to make his initial appearance in federal court to face the securities fraud charge later this week.

In the separate civil action, the SEC made the same charges against Mendes but also named his “close friend,” Dabbaghian, as a defendant.

The SEC is seeking a jury trial and to permanently restrain and enjoin the defendants from directly or indirectly engaging in future conduct in violation of securities laws and prohibiting them from acting as an officer or director of any issuer that has a class of registered securities.

The SEC is also looking to force Mendes to disgorge all his “ill-gotten gains,” plus prejudgment interest and pay civil penalties.

(Image: Shutterstock)