Showing posts with label SEC. Show all posts
Showing posts with label SEC. Show all posts

Thursday, June 12, 2014

Secure that First Investor examines the concept that investors do not like to be alone. It's all about shared risk.

Calling it the "me, too" world of venture capital, where everyone appears to invest as part of a syndicate. Indeed, the typical first question out of a VC's mouth when talking to a startup about investing is, "Who's leading this?" The question points to a paradox about VCs in general. Everyone wants to tout that they're the best at sniffing out the next WhatsApp, but when it comes to putting money behind that startup, they want some other firm to have skin in the game first.

Nobody in the VC world likes to go it alone.

In the eyes of entrepreneurs, this makes VCs look like a scared bunch, but there is a rationale to this: It hedges risk. By syndicating an investment--even if the total amount invested is small enough for a firm to manage on its own--there is a bigger pool of funds available for future funding rounds or, alternatively, a reduction in losses should things go south. The more investors at the table, the more they can share the cost and time of conducting due diligence and hammering out term sheets.

Read the entire article at Secure That First Investor, and the Rest Will Come |


Oue clients at Sallah Astarita & Cox include  hedge funds, venture capitalists and individual investors. For  information regarding private investing, contact Mark Astarita at 212-509-6544 or email us.

SEC Charges Bitcoin Entrepreneur With Offering Unregistered Securities

The Securities and Exchange Commission charged the co-owner of two Bitcoin-related websites for publicly offering shares in the two ventures without registering them.

An SEC investigation found that Erik T. Voorhees published prospectuses on the Internet and actively solicited investors to buy shares in SatoshiDICE and FeedZeBirds. But he failed to register the offerings with the SEC as required under the federal securities laws. Investors paid for their shares using Bitcoin, a virtual currency that can be used to purchase real-world goods and services and exchanged for fiat currencies on certain online exchanges. The profits ultimately earned by Voorhees through the unregistered offerings totaled more than $15,000.

Voorhees agreed to settle the SEC's charges by paying full disgorgement of the $15,843.98 in profits plus a $35,000 penalty for a total of more than $50,000.

The bitcoin logo
"All issuers selling securities to the public must comply with the registration provisions of the securities laws, including issuers who seek to raise funds using Bitcoin," said Andrew J. Ceresney, director of the SEC's Division of Enforcement. "We will continue to focus on enforcing our rules and regulations as they apply to digital currencies."

According to the SEC's order instituting a settled administrative proceeding, the first unregistered offering occurred in May 2012 as 2,600 bitcoins were raised through the sale of 30,000 shares in FeedZeBirds, which promises to pay bitcoins to Twitter users who forward its sponsored text messages. Then in two separate offerings from August 2012 to February 2013, SatoshiDICE sold 13 million shares and raised 50,600 bitcoins that were worth approximately $722,659 at the time. SatoshiDICE, which calls itself the biggest Bitcoin-betting game in the world and pays out casino-like winnings in bitcoins, ultimately returned these offering proceeds to investors in a buy-back transaction in July 2013. A significant rise in the exchange rate of U.S. dollars to bitcoins actually increased the amount paid back to investors to approximately $3.8 million for 45,500 bitcoins.

The SEC's order finds that Voorhees actively solicited investors to buy FeedZeBirds and SatoshiDICE shares on a website dedicated to Bitcoin known as the Bitcoin Forum. Voorhees also publicly promoted the unregistered offerings on other Bitcoin-related websites as well as Facebook. The first unregistered offering was explicitly referred to as the "FeedZeBirds IPO." Despite these general solicitations, no registration statement was filed for the FeedZeBirds or SatoshiDICE offerings, and no exemption from registration was applicable to these transactions.

The SEC's order finds that Voorhees violated Sections 5(a) and 5(c) of the Securities Act of 1933. Voorhees consented to cease and desist from committing or causing any future violations of the registration provisions without admitting or denying the SEC's findings. In addition to the monetary sanctions, Voorhees agreed that he will not participate in any issuance of any security in an unregistered transaction in exchange for any virtual currency including Bitcoin for a period of five years. The entry of the SEC's order disqualifies Voorhees from relying on Rule 506(b) and 506(c) of Regulation D under the Securities Act, as defined in the bad actor disqualification provisions of Rule 506.

More Information:

Investor Alert: Bitcoin and Other Virtual Currency-Related Investments

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Wednesday, June 11, 2014

SEC Awards $875,000 to Two Whistleblowers Who Aided Agency Investigation

The SEC has awarded a whistleblower more than $875,000 to be split evenly between two individuals who provided tips and assistance to help the agency bring an enforcement action.

The SEC's whistleblower program authorized by the Dodd-Frank Act rewards high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million. Whistleblower awards can range from 10 percent to 30 percent of the money collected in a case.

Seal of the U.S. Securities and Exchange Commi...By law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower's identity.

"These whistleblowers provided original information and assistance that enabled us to investigate and bring a successful enforcement action in a complex area of the securities market," said Sean McKessy, chief of the SEC's Office of the Whistleblower. "Whistleblowers who report their concerns to the SEC perform a great service to investors and help us combat fraud."

A total of eight whistleblowers have been awarded through the SEC's whistleblower program since it began in late 2011. For more information about the whistleblower program and how to report a tip, visit

For more information -SEC Awards $875,000 to Two Whistleblowers Who Aided Agency Investigation

Do you think you have sufficient information to be a whistleblower? Call 212-509-6544 or send us an email.
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Tuesday, May 20, 2014

Penson Executives Face SEC Charges of SHO Violations

The Securities and Exchange Commission today announced charges against four former officials at clearing firm Penson Financial Services for their roles in Regulation SHO violations.

An SEC investigation found that Penson’s securities lending practices intentionally and systematically violated Rule 204 under Reg. SHO.  The SEC’s Enforcement Division alleges that Penson’s chief compliance officer Thomas R. Delaney II had direct knowledge that the firm’s procedures for sales of customer margin securities were resulting in rule violations, yet he didn’t take steps to bring Penson into compliance and instead affirmatively assisted the violations.  Penson’s president and CEO Charles W. Yancey ignored significant red flags about Delaney’s involvement in the violations and the fact that he was concealing them from FINRA and the SEC.

Penson has since filed for bankruptcy.

Two former Penson securities lending officials – Michael H. Johnson and Lindsey A. Wetzig – were charged in administrative proceedings and agreed to settle the charges.  The SEC Enforcement Division will litigate the charges against Delaney and Yancey in a separate proceeding.

For more information visit | SEC Announces Charges Against Four Former Officials at Clearing Firm Penson Financial Services for Regulation SHO Violations 


The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

Tuesday, May 13, 2014

Insider Trading Tips - It is also a Crime

More hints for avoiding an insider trading charge. According to the SEC, three Qualcomm executives decided to purchase the securities of an acquisition target after reading work emails and discussing the trades by telephone.

Seal of the U.S. Securities and Exchange Commi...The SEC charged three former sales managers at San Diego-based Qualcomm Inc. with insider trading ahead of a major acquisition announcement. As news leaked about the impending acquisition and the two companies subsequently announced it in a joint news release, Atheros' stock price jumped 20 percent. The executive sold their securities to realize quick profits.

Anyone who reads this blog, or who follows insider trading cases knows that this is a classic case of insder trading - assuming the allegations to be true. However, what some folks don't realize, is that it is a crime as well. These defendants are now aware of it - the U.S. Attorney's Office for the Southern District of California today announced criminal charges against two of them.

The SEC alleges that after learning confidentially that Atheros was the target of a Qualcomm acquisition, all three sales managers proceeded to purchase Atheros securities on Jan. 4, 2011. None of them had ever previously traded in Atheros securities. News of the acquisition began leaking out through media reports that same afternoon, and the two companies formally announced the merger agreement on January 5. After selling all of the securities they had purchased, Cohen's illegal trading profits mounted to more than $200,000, and Herman and Fleischli made profits of $30,000 and $3,000 respectively.

The SEC's complaint charges Cohen, Herman, and Fleischli with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, and permanent injunctions.

For more information: SEC Charges Three Sales Managers With Insider Trading Ahead of Major Acquisition
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Thursday, May 1, 2014

Stock Promoter Charged with Fraud in Florida Real Estate Venture

The Securities and Exchange Commission today filed fraud charges against a former Florida-based stock promoter currently serving a two-year prison sentence for lying to SEC investigators.

English: A fake post office in Laguna Beach, F...
A fake post office in Laguna Beach, Florida that was part of a real estate fraud scheme for several years. Authorities shut it down in 1946. (Photo credit: Wikipedia)
The SEC's complaint filed in U.S. District Court in the Southern District of Florida alleges that Robert J. Vitale defrauded investors in a Florida real estate venture, sold unregistered securities, and acted as an unregistered broker-dealer. Vitale and his firm Realty Acquisitions & Trust Inc. raised at least $8.7 million from investors, including many senior citizens. Vitale allegedly told investors their funds were "100% protected" when they were not, and he claimed to be a financial expert with a business degree from Notre Dame when he never attended college after graduating from Notre Dame High School in West Haven, Conn.

The SEC alleges that although Vitale told investors his success rested on his "great honesty and integrity," he failed to tell them that he was charged by the SEC in 2004 for participating in a pump-and-dump market manipulation scheme or that he later settled the charges and was barred from the brokerage industry as part of the settlement.

Vitale is now an inmate at the Federal Detention Center in Miami. He was sentenced in September 2013 after being convicted of obstruction of justice and providing false testimony in the SEC's investigation that led to the charges filed today.

"We are gratified that the criminal authorities held Mr. Vitale responsible for his attempts to derail our investigation," said Andrew J. Ceresney, director of the SEC's Division of Enforcement. "His prison sentence and our determination to uncover and charge his underlying misconduct notwithstanding his obstruction show how seriously we and our law enforcement partners take our missions."

The SEC is seeking the return of allegedly ill-gotten gains with interest, a monetary penalty, and a permanent injunction against Vitale. The SEC's complaint also charges Coral Springs Investment Group Inc. as a relief defendant, alleging the company holds assets that came from defrauded investors that should be returned.

"Vitale hid the truth from investors just as he tried to hide his assets during our investigation," said Stephen L. Cohen, associate director of the SEC's Division of Enforcement. "When individuals barred from the industry continue their wrongdoing, we pursue them aggressively and seek to return their ill-gotten gains to investors."

For more informatino visit SEC Charges Former Stock Promoter With Defrauding Investors in Florida Real Estate Venture

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Wednesday, April 30, 2014

Tech Company Insider Accused of Tipping Inside Information

The Securities and Exchange Commission filed insider trading charges against a former accounting manager at Nvidia Corp. who tipped a friend with confidential company information that set in motion a chain of tipping and illegal trading among a network of hedge fund traders who reaped millions of dollars in illicit gains.

NVIDIA logoThe SEC alleges that Chris Choi of San Jose, Calif., tipped his friend Hyung Lim with nonpublic information about Nvidia's financial performance in advance of the technology company's quarterly earnings announcements in 2009 and 2010. Lim relayed Choi's information to a fellow poker player Danny Kuo, who was a hedge fund manager at Whittier Trust Company. Kuo illegally traded on the inside information for his firm and passed it along to analysts at such other firms as Diamondback Capital Management, Level Global Investors LP, and Sigma Capital Management, which is an affiliate of S.A.C. Capital Advisors LP. The analysts relayed Choi's information to their portfolio managers who caused funds to conduct insider trading in Nvidia securities.

Choi, who agreed to settle the SEC's charges, is the 45th defendant charged by the SEC in its ongoing investigation into the activities of expert networks. The investigation has exposed widespread insider trading by investment professionals, hedge funds, and corporate insiders for illicit profits of approximately $430 million. The SEC previously charged Choi's tippees, including Lim as well as Kuo, Diamondback, and Level Global and Sigma Capital. The expert networks investigation arose out of the SEC's inquiry into Galleon Management and Raj Rajaratnam – a case in which the SEC has charged an additional 35 defendants whose insider trading generated illicit profits of more than $96 million.

"Insiders at public companies who are entrusted with confidential information are duty bound to protect it," said Sanjay Wadhwa, senior associate director of the SEC's New York Regional Office. "Choi violated that sacred duty by regularly tipping his friend with nonpublic financial data that hedge fund traders exploited for millions of dollars in illegal profits."

According to the SEC's complaint filed in U.S. District Court for the Southern District of New York, Choi's illegal tips enabled hedge funds to reap approximately $16.5 million in illicit profits and avoided losses. Choi routinely provided Lim with nonpublic information about Nvidia's highly confidential calculations of its revenues, gross profit margins, and other financial metrics ahead of its quarterly earnings announcements.

The SEC's complaint charges Choi with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933. Choi has agreed to pay a $30,000 penalty and be barred from serving as an officer or director of a public company for five years. Without admitting or denying the allegations, Choi agreed to be permanently enjoined from future violations of these provisions of the federal securities laws. The settlement is subject to court approval.

For more information, see the SEC's press release, which also contains a link to the insider trading complaint.

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Tuesday, April 29, 2014

Tippees Turn on Tipper in Insider Trading Investigation - And the Tipper's Penalty is Based on Their Profits!

Committing a securities law violation with the assistance of others has added risk. Sometimes your co-conspirators turn against you to save their own necks. And in an insider trading case, the penalties can be huge.

In the recent case of the e-commerce company executive who tipped his friend about eBay's acquisition of his company demonstrates the point. According to the SEC, Christopher Saridakis tipped his friends and relatives of a pending deal so they could attain more than $300,000 in illegal profits. However, the SEC uncovered the case and was able to prosecute because of "extensive cooperation" of some of the tippees.

The problem is that the penalties for insider trading are draconian - disgorgement of all profits (exclusive of losses!), interest on those profits, and a penalty twice the amount of the disgorgement. So, for every $10,000 in gross profits, the insider trader could wind up paying $30,000 back, plus interest.

That's not all. In the SEC's view of the world (which should be unconstitutional) a tipper is liable for the profits of his tippees. That significantly increases the risk - you tip your friends about a deal, they trade, you are liable for their profits. 

And, just to add insult to injury, the US Attorney files criminal chages against you for securities fraud.

The entire scenario stinks, and presents a case where the penalty does not fit the crime, but this is the world we live in. So, it  is not a surprise that some of the tippees cooperated. What is surprising is that the SEC entered into its first  non-prosecution agreement with an individual. The SEC's investigation is continuing into trading by other individuals.

In the underlying case, the SEC alleges that Christopher Saridakis violated a duty of trust as CEO of the marketing solutions division of GSI Commerce by providing two family members and two friends with nonpublic information about the pending acquisition and encouraging them to trade on it. To settle the SEC's charges, Saridakis agreed to an officer-and-director bar and must pay $664,822, which includes a penalty equal to twice the amount of his tippees' profits. In a parallel action, the U.S. Attorney's Office for the Eastern District of Pennsylvania today announced criminal charges against Saridakis, who lives in Delaware.

The five traders and the individual who entered into a non-prosecution agreement will pay a combined total of more than $490,000 in their settlements, which range from disgorgement-only or reduced penalties for cooperators to penalties of two or three times the trading profits for other traders.

"Although Saridakis' tips spun a web of illegal trading, some of the downstream tippees substantially assisted in our investigation while others hindered it," said Andrew J. Ceresney, director of the SEC's Division of Enforcement. "The reduction in penalties for those tippees who assisted us, together with the non-prosecution agreement for one of the traders, demonstrate the benefits of cooperating with our investigations. The increased penalties for others highlight the risks of impeding our work."

Scott Friestad, associate director of the SEC's Division of Enforcement, added, "Saridakis chose to dole out confidential, market-moving information to enrich relatives and friends, and the nonpublic details then spread further through multiple levels of tippers and tippees. The SEC thoroughly investigates suspicious trading to trace it to the source and pursue all those involved."

According to the SEC's complaint filed in federal court in Philadelphia, GSI Commerce was renamed eBay Enterprise after the merger and is still based in King of Prussia, Pa. When the deal was publicly announced on March 28, 2011, GSI's stock price increased more than 50 percent. Saridakis became aware of negotiations between GSI and eBay in early 2011, and his involvement increased when he participated in a meeting between eBay and GSI executives on March 11. GSI took steps to ensure the pending deal remained secret, and Saridakis understood that any information concerning the potential acquisition was confidential.

The SEC alleges that Saridakis, who became president of eBay Enterprise after the merger and has since resigned, tipped two family members in the weeks leading up to eBay's acquisition of GSI. The relatives made a combined $41,060 by trading on the nonpublic information provided by Saridakis, who in his settlement has agreed to pay disgorgement of that amount plus interest on behalf of those family members.

According to the SEC's complaint, Saridakis tipped his longtime friend and former colleague Jules Gardner, who lives in Villanova, Pa. The two regularly exchanged text messages during the weeks leading up to the merger, including an exchange one week before the public announcement in which Saradakis encouraged Gardner to buy shares in GSI. Gardner discussed the text messages from Saridakis with two friends who also traded. Gardner has agreed to fully disgorge his ill-gotten gains of $259,054 as part of a cooperation agreement in which the SEC is not seeking a penalty. Gardner agreed to continue cooperating in the ongoing investigation.

The SEC alleges that Saridakis separately tipped his friend Suken Shah, a doctor who resides in Wilmington, Del., with nonpublic information about the deal following the March 11 meeting with eBay executives. Shah earned insider trading profits of $9,838 and provided the nonpublic information to his brother and another individual. Shah agreed to settle the SEC's charges in an administrative proceeding by paying disgorgement of $10,446, which includes $609 in trading profits made by the other individual he tipped. Shah agreed to pay prejudgment interest of $1,007 and a penalty of $64,965 for a total of $76,418. Shah's penalty is three times the amount of his and his tippees' trading profits.

In a separate settled administrative proceeding, the SEC charged Shimul Shah, a doctor who now resides in Cincinnati, with insider trading on the nonpublic information he received from his brother. Besides trading himself, Shah tipped others with the nonpublic information during a group dinner he attended with several friends from his medical residency. To settle the SEC's charges, Shah agreed to disgorge his trading profit of $11,209 and pay prejudgment interest of $1,022 and a penalty of $22,418 for a total of $34,650. Shah's penalty is twice the amount of his trading profit.

The individual who entered into the non-prosecution agreement was tipped by Shah at the group dinner. This individual has agreed to disgorge a trading profit of $31,777 and pay $2,725 in prejudgment interest for a total of $34,502. The SEC entered into a non-prosecution agreement because this individual provided early, extraordinary, and unconditional cooperation.

The SEC also instituted settled administrative proceedings against two other traders in GSI stock who received material nonpublic information from a different source than Saridakis. The SEC's investigation found that the wife of another insider at GSI became aware of the proposed acquisition and shared the news with a friend the weekend before the public announcement. The friend shared the information with Oded Gabay, who then tipped his friend Aharon Yehuda. Gabay and Yehuda, who live in New York, each proceeded to trade GSI stock the following Monday morning.

Gabay agreed to settle the SEC's charges by disgorging his trading profit of $23,615 and paying prejudgment interest of $1,207 and a penalty of $22,177 for a total of $46,999. Gabay's penalty was reduced to half the amount of his and Yehuda's trading profits to reflect his early cooperation in the investigation. Yehuda agreed to settle the SEC's charges by disgorging his trading profit of $20,740 and paying prejudgment interest of $1,666 and a penalty of $20,740 for a total of $43,146.

For more information and the somplicaints and orders- SEC Charges Six Individuals With Insider Trading in Stock of E-Commerce Company Prior to Acquisition by eBay
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Wednesday, April 23, 2014

Honolulu Woman Charged with Fraud Through Social Media

Seal of the U.S. Securities and Exchange Commi...According to the SEC, its investigation found that Keiko Kawamura engaged in two separate fraudulent schemes to raise money from investors while casting herself as an investment and hedge fund expert when in fact she had virtually no prior trading experience. In one scheme, she sought investors for her self-described hedge fund and posted on Twitter some screenshots of brokerage account statements suggesting she was personally obtaining incredible investment returns. However, the account statements were not hers. And instead of investing the money she raised from investors, she spent it on her own living expenses and luxury trips to Miami and London. In a later scheme, Kawamura continued to boast phony experience to attract investors to her subscription service for investment advice. She falsely told subscribers that she had been in the investment banking industry for nearly a decade and had achieved 800 percent returns in her personal brokerage account.

"As alleged in our case, Kawamura used social media to ensnare investors and raise money to support her lifestyle," said Michele Wein Layne, director of the SEC's Los Angeles Regional Office. "Investors should beware of fraudsters who use social media to hide behind anonymity and reach many investors with little to no cost or effort."

The SEC's order instituting administrative proceedings alleges that Kawamura willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 20(4)-8. The administrative proceedings will determine any remedial action or financial penalties that are appropriate in the public interest against Kawamura.

SEC Announces Charges Against Honolulu Woman Defrauding Investors Through Social Media

SEC Investor Alert: Social Media and Investing - Avoiding Fraud

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Saturday, April 5, 2014

SEC Expanding the Scope of Insider Trading

Despite all of the insider trading investigations and cases we have handled there are two aspects of these cases that still amaze us - the convoluted charges that the Commission  sometimes files, and the contortions that some folks go through to avoid detection. For the latter, we recently saw the cases of the middleman who ate the notes with the stock symbol, the investors who thought cell phones would avoid detection, trading in a girlfriend's account to pay alimony Some of these cases involve mere allegations that the SEC cannot prove - like the case against the Florida doctor where attorneys from Sallah Astarita & Cox successfully defended the doctor, and the loss against Mark Cuban, but others involve a poor scheme, or a poor defense strategy.

The SEC has now announced charges in two separate cases against men who allegedly profited by insider trading on confidential information they learned from their wives about Silicon Valley-based tech companies.

"Spouses and other family members may gain access to highly confidential information about public companies as part of their relationship of trust," said Jina L. Choi, director of the SEC's San Francisco Regional Office. "In those circumstances, family members have a duty to protect and safeguard that information, not to trade on it."
It is a questionable legal theory, and a continued expansion, beyond all logical bounds, of 10b-5 liability, but a theory that the SEC continues to pursue.

Image representing Oracle Corporation as depic...In the first case the SEC alleges that Tyrone Hawk of Los Gatos, Calif., violated a duty of trust by trading after he overheard work calls made by his wife, a finance manager at Oracle Corp., regarding her company's plan to acquire Acme Packet Inc. Hawk also had a conversation with his wife in which she informed him that there was a blackout window for trading Oracle securities because it was in the process of acquiring another company. According to the SEC's complaint, Hawk bought Acme Packet shares before the acquisition was announced in February 2013, and reaped approximately $150,000 by selling after the stock price rose 23 percent on the news. According to the SEC, Hawk decided not to fight the charges, and without admitting or denying the allegations, agreed to pay more than $300,000 to settle the SEC's charges.

For those of you not familiar with the SEC penalty and disgorgement calculations, that $300,000 is TWICE his alleged profits. The SEC will typicall seek penalties and disgorgement of THREE TIMES their calculation of the profit, in order to force their targets to settle.

In an unrelated case, the SEC alleges that Ching Hwa Chen of San Jose, Calif., profited from gleaning confidential information in mid-2012 that his wife's employer, Informatica Corp., would miss its quarterly earnings target for the first time in 31 consecutive quarters. During a drive to vacation in Reno, Nev., Chen overheard business calls by his wife, who previously advised Chen not to trade in Informatica securities under any circumstances. However, after they returned from Reno, he established securities positions designed to make money if the stock price fell. Informatica's shares declined more than 27 percent after it announced the earnings miss, and Chen realized nearly $140,000 in profits.

According to the SEC, Chen also decided not to fight and without admitting or denying the allegations, agreed to pay approximately $280,000 to settle the SEC's charges, again twice his alleged profits from the trades.

The SEC has brought other insider trading cases involving individuals who traded on material, nonpublic information misappropriated from spouses. For example, last year the SEC charged a Houston man with insider trading ahead of a corporate acquisition based on confidential details that he gleaned from his wife, a partner at a large law firm that was consulted on the deal. In 2011, the SEC charged an Illinois man who bought the stock of an acquisition target of a company where his wife was an executive despite her requests that he keep the merger information confidential. In a different 2011 case, the SEC charged the spouse of a CEO with insider trading on confidential information that he misappropriated from her in advance of company news announcements.

Unfortunately, because these cases settle, the questionable legal theory is not being tested. Is trading on information gleaned from overhearing a spouse's telephone conversation truly a misappropriation of information. While the misappropriation theory of insider trading has turned the securities statutes on its head, it is the law of the land. Now we have additional expansion of this already expanded theory of liability to cases where nothing is stolen or misappropriated.

The SEC is enacting legislation through its enforcement powers. That is unconstitutional and needs to be addressed by Congress.

The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in representation of brokers and investors in regulatory investigations, including insider trading cases. For a free consultation on any securities regulatory matter, contact Mark Astarita at 212-509-6544 or email us.

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Tuesday, April 1, 2014

Coal Company and CEO Charged by SEC for False Disclosures About Management

Here is one type of case we don't see too often. The SEC has filed fraud charges against a Seattle-headquartered coal company and its founder for making false disclosures about who was running the company.

A coal mine in Wyoming, United States. The Uni...
The SEC's Enforcement Division alleges that L&L Energy Inc., which has all of its operations in China and Taiwan, created the false appearance that the company had a professional management team in place when in reality Dickson Lee was single-handedly controlling the company's operations. An L&L Energy annual report falsely listed Lee's brother as the CEO and a woman as the acting CFO in spite of the fact that she had rejected Lee's offer to serve in the position the month before. L&L Energy and Lee continued to misrepresent that they had an acting CFO in the next three quarterly reports. Certifications required under the Sarbanes Oxley Act ostensibly bore the purported acting CFO's electronic signature. Lee and L&L Energy also allegedly misled NASDAQ to become listed on the exchange by falsely maintaining they had accurately made all of their required Sarbanes-Oxley certifications.

In a parallel action, a criminal indictment against Lee was unsealed today in federal court in Seattle. The U.S. Attorney's Office in the Western District of Washington is prosecuting the case.

"Lee and L&L Energy deceived the public by falsely representing that the company had a CFO, which is a critical gatekeeper in the management of public companies," said Antonia Chion, associate director in the SEC's Enforcement Division. "The integrity of Sarbanes-Oxley certifications is critical, and executives who manipulate the process will be held accountable for their misdeeds."

The SEC's order is online and its press release has the details.

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Monday, March 31, 2014

Pyramid Scheme Targeting Asian and Latino Community Halted.

The Securities and Exchange Commission today announced charges and asset freezes against the operators of a worldwide pyramid scheme targeting Asian and Latino communities in the U.S. and abroad.
Seal of the U.S. Securities and Exchange Commi...

The SEC alleges that three entities collectively operating under the business names WCM and WCM777 are posing as multi-level marketing companies in the business of selling third-party cloud computing services, which can include website hosting, data storage, and software support. The entities are based in California and Hong Kong and controlled by “Phil” Ming Xu, who is a resident of Temple City, California. 

According to the SEC’s complaint filed in federal court in Los Angeles, WCM and WCM777 have raised more than $65 million since March 2013 by falsely promising tens of thousands of investors that the return on investment in the cloud services venture would be 100 percent or more in 100 days. Investors were told they would receive “points” for making investments or enrolling other investors. The points would be convertible into equity in initial public offerings of high-tech companies their money would help launch. However, rather than building out cloud services or incubating high-tech companies, Xu and the WCM entities used investor funds to make Ponzi payments of purported investment returns to some investors. They also spent investor money to purchase golf courses and other U.S.-based properties among other unauthorized expenditures.

The court has granted the SEC’s request for an asset freeze and the appointment of a temporary receiver over the assets of WCM, WCM777, and several other entities named as relief defendants for the purpose of recovering money from the scheme in their possession.

“Xu and his entities claimed they were using investor funds to build a strong cloud services company that would then ignite other high-tech companies and ultimately make their investors very wealthy,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office. “In reality, they were operating a pyramid scheme that preyed on investors in particular ethnic communities, leaving them with nothing left to show for their investment.”

According to the SEC’s complaint, WCM and WCM777 sell their products exclusively to investors and have no other apparent sources of revenue. Their offerings and operations depend almost entirely on the recruitment of new investors and purchases by existing investors to provide the money for returns. On its website, WCM777 specifically addressed the question “Is WCM777 a Ponzi Game?” by writing, “In summary, we are not a Ponzi game company. We are creating a new business model.”

The SEC alleges that Xu and his entities made various false claims to investors about purported partnerships with more than 700 major companies such as Siemens, Denny’s, and Goldman Sachs – in some instances falsely representing that they had permission to use their logos. Meantime, besides buying two golf courses with investor money, Xu and his entities also purchased a warehouse, vacant land, and several single family homes They also used investor funds to play the stock market and make other related investments through intermediary companies, such as an oil and gas offering. They also sent investor money to a rough diamond jewel merchant in Hong Kong and another unrelated company affiliated with Xu.

SEC’s complaint alleges that WCM, WCM777, and Xu violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. The complaint further alleges that Xu violated Section 20(a) of the Exchange Act. In addition to the asset freezes and appointment of a temporary receiver, the Honorable Christina A. Snyder also granted the SEC’s request for an order prohibiting the destruction of documents and requiring the defendants to provide accountings. A court hearing has been scheduled for April 10, 2014.

For more information about the dangers of potential investment scams involving pyramid schemes posing as multi-level marketing programs, see the SEC’s investor alert, which also is available in Chinese.

If you have been damaged by this, or any other investment scheme, contact Sallah Astarita & Cox for a free consultation.

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Thursday, February 27, 2014

Arizona-Based Private Equity Fund Manager Charged in Expense Misallocation Scheme

The Securities and Exchange Commission today announced charges against an Arizona-based private equity fund manager and his investment advisory firm for orchestrating a scheme to misallocate their expenses to the funds they manage.

The SEC Enforcement Division alleges that Scott A. Brittenham and Clean Energy Capital LLC (CEC) improperly paid more than $3 million of the firm's expenses by using assets from 19 private equity funds that invest in private ethanol production plants. CEC and Brittenham did not disclose any such payment arrangement in fund offering documents. When the funds ran out of cash to pay the firm's expenses, CEC and Brittenham loaned money to the funds at unfavorable interest rates and unilaterally changed how they calculated investor returns to benefit themselves.

"Brittenham betrayed investors in the funds he managed by burdening them with more than $3 million in expenses that his firm should have paid and the funds could not afford," said Marshall S. Sprung, co-chief of the SEC Enforcement Division's Asset Management Unit. "Private equity advisers can only charge expenses to their funds when they clearly spell that out for investors."

According to the SEC's order instituting administrative proceedings, among the expenses that CEC and Brittenham have been misallocating to the funds are CEC's rent, salaries, and other employee benefits such as tuition costs, retirement, and bonuses. Brittenham even used fund assets to pay 70 percent of a $100,000 bonus that he awarded himself. The money taken from the funds for firm expenses was in addition to millions of dollars in management fees already being paid to CEC out of the funds.

According to the SEC's order, the expense misallocation scheme shrank the funds' cash reserves. So CEC and Brittenham made unauthorized "loans" to the funds at exorbitant rates as high as 17 percent in order to continue paying the improper expenses with fund assets. The loans jeopardized the funds because Brittenham had pledged fund assets as collateral. CEC and Brittenham further profited at the expense of fund investors by making several changes to how CEC calculated distributions to investors in order to pay out less money. Brittenham also lied to a fund investor about his "skin in the game." Brittenham claimed that he and CEC's co-founder had each invested $100,000 of their own money in one of the funds, but the actual amounts invested were only $25,000 each.

The SEC's order alleges that CEC and Brittenham willfully violated the antifraud provisions of the federal securities laws and also asserts disclosure, compliance, custody, and reporting violations.

The SEC's investigation was conducted by Payam Danialypour and C. Dabney O'Riordan of the Asset Management Unit in the Los Angeles Regional Office and accountant Deborah Russell in Washington D.C. The SEC's litigation will be led by Amy Longo, Lynn Dean, and Mr. Danialypour. The SEC examination that led to the investigation was conducted by Ryan Hinson, Ernest Tang, Daniel Jung, and Thomas Mackin of the Los Angeles office's investment adviser/investment company examination program.

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Wednesday, February 26, 2014

Wall Street Investment Banker With Insider Trading in Former Girlfriend's Account to Pay Child Support.

The Securities and Exchange Commission filed an emergency action against a New York City-based investment banker charged with insider trading for nearly $1 million in illicit profits.

SECThe SEC alleges that while working on Wall Street, Frank “Perk” Hixon Jr. regularly logged into the brokerage account of Destiny “Nicole” Robinson, the mother of his young child.  He executed trades based on confidential information he obtained on the job, sometimes within minutes of learning it.  Illegal trades also were made in his father’s brokerage account.  When his firm confronted him about the trading conducted in these accounts, Hixon Jr. pretended not to recognize the names of his father or his child’s mother.  However, text messages between Hixon Jr. and Robinson suggest he was generating the illegal proceeds in lieu of formal child support payments.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Hixon Jr.
“Hixon Jr. violated the trust of his employer and clients by abusing his special access to nonpublic market-moving information,” said David Woodcock, director of the SEC’s Fort Worth Regional Office.  “Hixon Jr. went to great lengths to hide his wrongdoing and even denied knowing his father or the mother of his child.”
A federal judge has granted the SEC’s request and issued an emergency order freezing Robinson’s brokerage account, which the SEC alleges contains the majority of proceeds from Hixon Jr.’s illegal trading with a balance of approximately $1.2 million. 
According to the SEC’s complaint unsealed today in federal court in Austin, Texas, Hixon Jr. illegally tipped or traded in the securities of three public companies.  He traded ahead of several major announcements by his client Westway Group in 2011 and 2012.  He traded based on nonpublic information he learned about potential client Titanium Metals Corporation ahead of its merger announcement in November 2012.  And Hixon even illegally traded in the securities of his own firm Evercore Partners prior to its announcement of record earnings in January 2013.  Hixon Jr. generated illegal insider trading profits of at least $950,000. 
According to the SEC’s complaint, when Hixon Jr.’s employer asked him in 2013 whether he knew anything about suspicious trading in accounts belonging to Destiny Robinson and his father Frank P. Hixon Sr., who lives in suburban Atlanta, Hixon Jr. denied recognizing either name.  When later confronted with information that he did in fact know these individuals, Hixon Jr. continued his false claims, saying he didn’t know Robinson as “Destiny” and asserting in a sworn declaration that when approached he didn’t recognize the name of the city where his father lived for more than 25 years.  Hixon Jr. was subsequently terminated by his employer.
The SEC’s complaint alleges that Hixon Jr. violated the antifraud provisions of the Securities Exchange Act of 1934.  In addition to the asset freeze, the complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.  Hixon Sr. and Robinson have been named as relief defendants for the purposes of recovering the illegal trading profits held in their accounts.

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Monday, January 6, 2014

Tips for Responding to an SEC Subpoena

Being forced to participate in an SEC investigation, even as a witness, can be a harrowing experience, and this is true whether you are a market professional, the CEO of a regulated entity, or an investor. That investigation can have a serious effect on your business, or your career and has the risk of consuming a significant amount of time, and money, even if you have engaged in any wrongful conduct. How you respond to the initial inquiry, and how you manage the events as the investigation continues often determines the outcome of that investigation..

SEC investigations can begin from a variety of sources, including anonymous tips, trading surveillance by the SEC, or the exchanges, customer complaints, or from information obtained by other government entities. Witnesses and even targets, often learn of the investigation by a simple telephone call from an investigator or staff attorney. That telephone call will be followed by a letter, which requests that you voluntarily provide information to the SEC Staff.

The first important step - do not have a discussion with the Staff, and should you ignore this step - do not give the Staff false information. Lying to the SEC can be the basis for a felony charge, and the last thing you want to do is to turn a defensible investigation into an indefensible criminal charge of obstruction. We have seen it happen in our own practice, and the world saw it happen - Martha Stewart went to jail for lying to SEC investigators. She did not go to jail for insider trading, and she had a viable defense to that charge.

From this point forward, you need to be involved, and to be proactive, and you need an experienced securities attorney. At this stage, the SEC undoubtedly does not have subpoena power, but that power is easily obtained. You mustt make a decision whether to voluntarily cooperate, and you should make that decision with an experienced securities attorney. Not only is a securities attorney knowledgeable about the law and the procedure involving investigations, the securities defense bar is small, and your attorney will have access to information and resources that you do not.

In addition, if there is any chance that you will become the subject of an investigation, or that any information you have may be damaging, you need to put an attorney between you, your employees and your company, and the SEC.

Your attorney will contact the Staff and attempt to determine what the nature and scope of the investigation. Unfortunately the Staff is not always forthcoming with that information, and you will have to prepare a response without knowing the scope of the investigation. Providing information on a voluntary basis is typically the better response, but not always, and you should keep in mind that some investigators can become quite vindictive if you do not voluntarily cooperate. Unfortunate, but true.

Together with your attorney you can manage that voluntary request to minimize the impact on your business. The SEC is notorious for asking for reams of documents, using demands that include "all documents relating to" an issue, and which can consume dozens of hours of time to identify, review and produce responsive documents. At this stage, you and your attorney can discuss the requests with the staff, seek clarification and modification of the requests to make that request manageable.

At this stage, you will also need to insure that documents, emails and notes, including electronic notes, are maintained and not destroyed. Employees need to be advised to preserve documents - no shredding, and no reformatting of hard drives. Again, being accused of destroying evidence after learning of an investigation can be worse than the outcome of the original investigation.

While the seriousness of the event is enough to cause concern, a large part of any subpoenaed broker's concern is the fear of the unknown, including the procedure, what will be discussed and the target of the investigation.

Tuesday, November 12, 2013

Prosecutors Investigating SEC Staff

In an interesting twist, the Wall Street Journal is reporting that federal prosecutors and the office of the inspector general of the U.S. Securities and Exchange Commission are conducting an investigation of the SEC's New York office for the possibility of improper investments.

According to Reuters, investigators are checking whether the employees' investments comply with SEC internal rules that prohibit trading shares of companies under investigation.

The article claims that the investigation appears limited to the New York office of the securities regulator, and there is no indication of widespread flouting of the rules, according to the report.

For more detail, visit U.S. authorities probing New York SEC staff investments 

Wednesday, November 6, 2013

Court Questions SAC Capital Advisors Settlement.

In an interesting twist to the historic settlement of charges against Steven Cohen's hedge fund entities, Judge Richard Sullivan has not approved the settlement, saying he needs more information about the accord's fairness.

Citing the recent judicial "debate" about how closely to scrutinize regulatory settlements, U.S. District Judge Richard Sullivan directed SAC and the U.S. Department of Justice to address at a hearing on Wednesday morning what standard he should use to evaluate the civil forfeiture portion of the accord.

Separately, Sullivan's colleague, U.S. District Judge Laura Taylor Swain, scheduled a Friday hearing to review the criminal portion of the settlement in which SAC agreed to plead guilty to five fraud counts.

For more detail, visit U.S. judge won't rubber-stamp SAC insider trade decision 

Monday, November 4, 2013

The Impact of the SAC Capital Advisors Criminal Guilty Plea

In what will surely be viewed as a controversial outcome, SAC Capital Advisors will plead guilty to criminal fraud charges, stop investing money for others and pay $1.8 billion — the largest financial penalty in history for insider trading — to resolve criminal and civil claims against the hedge fund giant, the government announced Monday.

The controversy will revolve around the impact of convicting a corporation of a crime. After all, you cannot put the corporation in jail. Further, since a criminal conviction effectively puts the corporation of out business, the impact of that conviction impacts all of the customers, employees and vendors of the corporation. 

While I firmly believe that it is a mistake to charge a corporation with a criminal offense - for exactly the reason stated above, this case is a bit different. 

First, many of its traders have been indicted for insider trading. Second, although Mr. Cohen was not indicted, he is, and remains, the subject of an SEC case for failing to supervise his employees. Third, with all of the negative publicity, the press conferences and Internet sites calling the firm "a magnet for cheating" and having "a culture of law-breaking" we can assume that the firm would not have lasted much longer, with or without an indictment. Finally, despite the marginal merit to the claims against Mr. Cohen personally, I would expect to see a settlement with the SEC any day now.

So, the firm was out of business, regardless of the indictment. But does that make it right? I will leave the academic discussion to the academics - I am just a securities litigator - but threatening to put a corporation out of business because of the wrongful conduct of employees - not necessarily the owners or executives - is not a path that we want to go down. The government has enough power over us - using the criminal process to force change inside of private companies by threatening to put them out of business is not a process that we should be encouraging.

The plea does end the case, and most of the related cases. Acccording to CNN,  prosecutors told the Judges presiding over the pending cases, that the "proposed global resolution" of the criminal and civil cases against SAC Capital Advisors and related companies also includes an agreement that SAC will cease operating as an investment adviser and will not accept any additional funds from third-party investors.

So, SAC Capital Advisors is out of business, with or without a criminal record. In addition, the company will pay a $900 million fine and forfeit another $900 million to the federal government, though $616 million that SAC companies have already agreed to pay to settle parallel actions by the U.S. Securities and Exchange Commission will be deducted from the $1.8 billion.

For more information - Hedge fund giant SAC Capital to pay $1.8B penalty

Thursday, October 17, 2013

SEC Loses Mark Cuban Suit

Years ago, in what we viewed as a far too convenient allegation, the SEC accused billionaire Mark Cuban of insider-trading. The allegations were odd - the SEC alleged that the CEO in question told Mr. Cuban, that he had confidential information to provide to him, and that Mr. Cuban agreed to keep it confidential. That allegation raises the question, can the CEO of a public company voluntarily provide material, non-public information to someone, and prevent that someone from trading? Is so, it is a great way to keep your largest shareholder from selling his stock - call him up and give him some inside information.

Seal of the U.S. Securities and Exchange Commi...I have a number of blog posts on the case. All are collected in Mark Cuban SEC. All predicted a loss for the SEC, given the sheer lack of legal weight to the claims.
But that is not often enough. It is an unfortunate part of our society that the government often wins cases simply because the target of its ire does not have the ability to fight back. There are countless examples of small brokerge firms, investors and individual brokers who settle SEC, or FINRA cases simply because they cannot afford to fight, even though they are right.

I had the pleasure to represent a broker who did not back down from a fight with FINRA, who  refused to settle with them when he was right and FINRA was wrong. It was a time consuming and expensive fight, but we won, and FINRA lost.

It was therefore a pleasure to watch Mark Cuban fight back. He certainly has the financial ability, but he also had the nerve to do so. And, after only a few hours of deliberation, much of which was probably discussing football, so as to not embarass the SEC, the jury in federal district court in Dallas said that the Securities and Exchange Commission failed to prove the key elements of its case, including the claim that Cuban agreed to keep certain information confidential and not trade on it.

During an impromptu news conference outside the courthouse, Mark Cuban angrily denounced the SEC and its lead trial attorney, Jan Folena, saying that they lied about the evidence and targeted him because of his fame.

Mr, Cuban acknowledged that  defendants of lesser wealth could have been bullied.
''Hopefully people will start paying attention to how the SEC does business,'' Cuban said. ''I'm the luckiest guy in the world. I'm glad this happened to me. I'm glad I'm able to be the person who can afford to stand up to them.''
For more information - Jury says Cuban did not commit insider trading 
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Tuesday, October 15, 2013

Previously Unknown Inside Traders in Heinz Settle SEC Charges

The Securities and Exchange Commission announced that two brothers in Brazil have agreed to pay nearly $5 million to settle charges that they were behind suspicious trading in call options for H.J. Heinz Company the day before the company publicly announced its acquisition.

The SEC filed an emergency enforcement action earlier this year to freeze assets in a Swiss-based trading account used to reap more than $1.8 million from trading in advance of the Heinz announcement.  The SEC’s immediate move the day after the announcement ensured the illicit profits could not be released out of the account while the investigation into the then-unknown traders continued.

In an amended complaint filed today in federal court in Manhattan, the SEC alleges that the order to purchase the Heinz options was placed by Rodrigo Terpins while he was vacationing at Walt Disney World in Orlando, and the trading was based on material non-public information that he received from his brother Michel Terpins.  The trades were made through an account belonging to a Cayman Islands-based entity named Alpine Swift that holds assets for one of their family members.  Rodrigo Terpins purchased nearly $90,000 in option positions in Heinz the day before the announcement, and those positions increased dramatically by nearly 2,000 percent the next day.

The Terpins brothers and Alpine Swift, which has been named as a relief defendant for the purposes of recovering ill-gotten gains, have agreed to disgorge the entire $1,809,857 in illegal profits made from trading Heinz options.  The Terpins brothers also will pay $3 million in penalties.  The settlement is subject to court approval.

For more detail, visit | Previously Unknown Insider Traders in Heinz Agree to $5 Million Settlement