Were Elon's Tesla Tweets Illegal?

Musk tweeted, and Tesla crashed, but was it securities fraud?

Some background from The Verge:

Musk tweeted he’d sell “almost all” his physical possessions. Well, all right. Then, he tweeted that Tesla’s share price was too high, sending its shares down. Then he tweeted part of “The Star Spangled Banner,” America’s difficult-to-sing national anthem. He encouraged us all to “rage, rage against the dying of the light of consciousness,” which somewhat mangles the meter of Dylan Thomas’ best-known poem. He announced his girlfriend, the musician Grimes, was mad at him.

https://www.theverge.com/2020/5/1/21244747/elon-musk-tesla-tweets-shares-sec-settlement-stock

Tesla's stock crashed after these events, but did Musk act illegally?

The answer is probably no, based on these facts. Basic securities fraud by market manipulation requires an intent to impact the market by a false or misleading statement. So, first the SEC, or a private investor would have to prove that Musk acted with "scienter", that is that he acted with the knowledge that what he was doing was wrong. That is harder to prove unless Musk had some motivation to depress the price of the stock, like owning puts, or planning a stock buyback.

At the same time, is it illegal for an executive to state that his company's stock price is too high? Again, unless he is going to profit from it, probably not, and one could argue that he has an obligation to speak out.

One additional  twist. In his settlement with the SEC last year Musk agreed to have his tweets pre-approved by a company lawyer. If he did not, he may be in violation of the settlement, leading to a host of different problems.

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Mark Astarita is a nationally recognized securities lawyer. He and his partners in his law firm, Sallah Astarita & Cox, LLC, are former SEC and brokerage firm attorneys, representing investors, corporate executives and financial professionals in securities fraud matters across the  country.

Indicting Corporate Officers?

A common criticism of our system of securities and banking regulation is that the regulators do not punish the executives at the large banks who create, or permit, the wrongful conduct. Of course, they will fine the same executives at a small bank, but executives at the large banks seem to get away unscathed.

Take for example Wells Fargo's phony account scandal. In September 2016,Wells Fargo agreed to pay $185 million in fines in connection with the more than two million customer accounts that had been flagged as potentially unauthorized. Wells Fargo also disclosed that it was facing investigations by the Justice Department and the Securities Exchange Commission.

Then there was no significant news on the matter for three years. except for Wells Fargo bankers and brokers who continued to lose clients because of the bank's scandals, and the firm's difficulty in recruiting brokers to join the firm.

After hints during the last two years that indictments were in the making, On Wall Street  reported this week that "[m]ultiple former high-level Wells Fargo executives are under criminal investigation in connection with the bank’s fake-account scandal and could be indicted as soon as this month."

Indictments of executives will depend on who knew what, and when they knew it. According to press reports, some executives have been forced to resign, but to our knowledge, none of lost their licenses or been indicted.

Yet.

Tesla Investigation

Sallah Astarita & Cox is reviewing comments by Elon Musk and SEC filings by Tesla for possible securities fraud claims.

If you have information relative to these issues, or believe you have been the victim of securities fraud call Sallah Astarita & Cox at 212.509.6544.

FINRA Proposes Arbitration Changes

The FINRA Board of Governors met this week to discuss a number of issues, including several rulemaking items. A summary of the arbitration rule proposals, as approved by the Board:

Chairperson Eligibility in Arbitration
The Board authorized filing with the SEC proposed amendments to Rules 12400 and 13400 (Neutral List Selection System and Arbitrator Rosters) to revise the arbitration forum chairperson eligibility requirements. Specifically, an attorney arbitrator would be eligible for the chairperson roster if he or she completes chairperson training and serves as an arbitrator through award on at least one arbitration, instead of two arbitrations, administered by a self-regulatory organization in which hearings were held.

Motions to Dismiss in Arbitration
The Board authorized filing with the SEC proposed amendments to Rules 12504 and 13504 (Motions to Dismiss) to provide that arbitrators in its forum may act upon a motion to dismiss prior to the conclusion of a party’s case in chief if the arbitrators determine that the non-moving party previously brought the same dispute against the same party, and the dispute was fully and finally adjudicated on the merits.

Panel Selection in Customer Cases with Three Arbitrators
The Board authorized filing with the SEC proposed amendments to Rule 12403 (Cases with Three Arbitrators) to increase the number of public arbitrators on the list that FINRA sends parties during the panel selection process in customer cases. Specifically, FINRA would increase the number of public arbitrators on the list from 10 to 15. FINRA would also increase the number of strikes to the public list from four to six, to keep the proportion of strikes the same under the amended rule as it is under the current rule.

- See more at: http://www.finra.org/industry/update-finra-board-governors-meeting-17#sthash.yOpUisct.dpuf

Texas Attorney General Ken Paxton, indicted for felony securities fraud, booked in Dallas

Texas Attorney General Ken Paxton has been booked at a Dallas-area jail on felony charges alleging that he misled investors before becoming the state's top lawyer, Paxton was charged with two counts of first-degree securities fraud and a lesser count of failing to register with state securities regulators.

Texas Attorney General Ken Paxton, indicted for felony securities fraud, booked in Dallas 



'via Blog this'

Supreme Court Strikes Middle Ground in Securities Fraud Cases

The securities-fraud lawsuit isn’t dead, though a Supreme Court ruling handed down Monday has left it wounded. The high court gave companies more ability to knock down securities-fraud lawsuits brought by investors, but it declined to overturn the controversial legal doctrine that has underpinned investor class actions for more than two decades.

For more information visit Supreme Court Strikes Middle Ground on Securities Fraud Lawsuits - Law Blog - WSJ

 

Reminder: Parking Stock is Illegal

It seems that every once in a while securities professionals need to be reminded that conduct that they think is done in the "ordinary course of business" is actually a securities law violation, with significant consequences.

Today's reminder is directed at Wall Street traders - arranging for another trader at another firm to take your position for a few days, with an agreement to buy it back is illegal.

Traders have been doing this for years, and apparently the practice is so widespread that many traders do not give it a second thought - until the trade blows up. A few years ago I represented a trader who agreed to hold a position for a fellow trader over the end of the month. The friend needed to reduce his position for month end. The trader-friend asked my client to buy the position, and agreed to purchase it back in four days at a small increase in price.

Unfortunately, over the weekend the underlying security crashed, and the trader-friend could not repurchase the position, leaving my client with a significant loss in his trading account, and an employer who was extremely upset, to say the least.

That one favor led to a termination of his employment, a lengthy arbitration (which we won), a FINRA investigation and settlement, the loss of his license and ultimately a bankruptcy. While the result might be extreme, it is not unusual.

The SEC recently filed charges against two traders involved in what the SEC labeled  a "fraudulent parking scheme" similar to the one I described above. One trader temporarily placed securities in the other's trading book to avoid penalties that would affect his year-end bonus.

The SEC's Enforcement Division alleged that Trader G solicited the assistance of Trader K to evade a policy at his firm that penalizes traders financially if they hold securities for too long. Trader G arranged for Trader K, who worked at a different firm, to purchase several securities with the understanding that G would repurchase them at a profit for K's firm. By parking the securities in K's trading book in order to reset the holding period when he repurchased them, G's intention was to avoid incurring any charges to his trading profits and ultimately his bonus for having aged inventory.

The alleged round-trip trades caused G's firm to lose approximately $174,000. The SEC's Enforcement Division alleged that after G's supervisor began inquiring about the trades, G and K took steps to evade detection by interposing an inter-dealer broker in subsequent transactions and communicating by cell phone to avoid having conversations recorded by their firms. G and K were eventually fired by their firms for the misconduct.

K, who cooperated with the SEC investigation, agreed to settle the charges by disgorging his profits and being barred from the securities industry. Any additional financial penalties will be determined at a later date. The Enforcement Division's litigation against G continues in a proceeding before an administrative law judge.

The order against G alleges that he willfully violated Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The order alleges that he willfully aided and abetted and caused violations of Section 17(a) of the Exchange Act and Rule 17a-3.

The order against K finds that he willfully aided and abetted and caused G's violations. The Commission took into account K's cooperation when agreeing to the settlement. K agreed to pay disgorgement of $22,606.80 and prejudgment interest of $1,503.66. The cease-and-desist order bars K from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization as well as participating in any penny stock offering, with the right to apply for re-entry after three years.

K did a friend a favor. And lost his license.

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Mark Astarita is a nationally recognized securities litigation attorney, representing firms and brokers nationwide in regulatory, litigation and arbitration matters. He can be reached at 212-509-6544 or by email at mja@sallahlaw.com

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New Jersey Brokerage Firm Charged in Manipulation

The Securities and Exchange Commission charged the owner of a Holmdel, N.J.-based brokerage firm with manipulative trading of publicly traded stocks through an illegal practice known as "layering" or "spoofing."

The SEC also charged the owner and others for registration violations. Two firms and five individuals agreed to pay a combined total of nearly $3 million to settle the case.

In layering, the trader places orders with no intention of having them executed but rather to trick others into buying or selling a stock at an artificial price driven by the orders that the trader later cancels. An SEC investigation found that Joseph Dondero, a co-owner of Visionary Trading LLC, repeatedly used this strategy to induce other market participants to trade in a particular stock. By placing and then canceling layers of orders, Dondero created fluctuations in the national best bid or offer of a stock, increased order book depth, and used the non-bona fide orders to send false signals to other market participants who misinterpreted the layering as true demand for the stock.

"The fair and efficient functioning of the markets requires that prices of securities reflect genuine supply and demand," said Sanjay Wadhwa, senior associate director of the SEC's New York Regional Office. "Traders who pervert these natural forces by engaging in layering or some other form of manipulative trading invite close scrutiny from the SEC."

Joseph G. Sansone, co-deputy chief of the SEC Enforcement Division's Market Abuse Unit, added, "Week after week, Dondero lined his pockets by placing phony orders and tricking others into trading with him at distorted prices. The fact that Dondero perpetrated this deceit through the entry of trade orders did not allow him to evade detection."

The SEC additionally charged Dondero, Visionary Trading, and three other owners with operating a brokerage firm that wasn't registered as required under the federal securities laws. New York-based brokerage firm Lightspeed Trading LLC is charged with aiding and abetting the registration violations, and its former chief operating officer is charged with failing to supervise one of the Visionary owners who shared with his co-owners commission payments that he received from Lightspeed while he was simultaneously working as a registered representative there.

According to the SEC's order instituting settled administrative proceedings, the misconduct occurred from May 2008 to November 2011. Visionary Trading and its four owners – Dondero, Eugene Giaquinto, Lee Heiss, and Jason Medvin – illegally received from Lightspeed a share of the commissions generated from trading by Visionary customers. Lightspeed aided and abetted the violation by ignoring red flags that Visionary and its owners were receiving transaction-based compensation while Visionary and its owners were not registered as a broker or dealer or associated with a registered broker-dealer firm.

According to the SEC's order, Lightspeed also failed to establish reasonable policies and procedures designed to prevent and detect the improper sharing of commissions between its registered representatives such as Giaquinto, who was associated with Lightspeed for part of the relevant period, and others who were not registered with the SEC in any capacity. Lightspeed's former COO Andrew Actman failed reasonably to supervise Giaquinto by not taking appropriate steps to address red flags indicating that Giaquinto was sharing commission payments that he received from Lightspeed with the other Visionary owners.

The SEC's order finds that Dondero violated Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Visionary and its owners willfully violated Section 15(a)(1) of the Exchange Act. Giaquinto willfully aided and abetted and caused Visionary's and his co-owners' violations of Exchange Act Section 15(a)(1). Lightspeed willfully aided and abetted and caused Visionary's and its owners' violations of Exchange Act Section 15(a)(1). Lightspeed and Actman failed reasonably to supervise Giaquinto.

In settling the SEC's charges, Dondero agreed to pay disgorgement of $1,102,999.96 plus prejudgment interest of $46,792 and penalties of $785,000 for a total exceeding $1.9 million. He agreed to a bar from the securities industry. Giaquinto, Heiss, and Medvin must each pay disgorgement of $118,601.96 plus prejudgment interest of $14,391.32 and a penalty of $35,000 for a combined total of more than $500,000 from the three of them. They are barred from the securities industry for at least two years. Lightspeed must pay disgorgement of $330,000 plus prejudgment interest of $43,316.54, post-order interest of $4,900.38, and a penalty of $100,000 for a total of approximately $478,000. Actman agreed to a penalty of $10,000 and a supervisory bar for at least one year.

SEC Charges Owner of N.J.-Based Brokerage Firm With Manipulative Trading

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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Puerto Rico Seeks To Calm Rattled Muni Bond Investors

Puerto Rico officials sought to soothe the fears of edgy investors Tuesday as the market continues to price risk into the tropical island’s widely held municipal bonds. “These are not just constitutional obligations, but also moral obligations,” said Governor Alejandro Garcia Padilla in an investor webinar, reaffirming the island’s intent to make good on its debt obligations.

Puerto Rico has roughly $70 billion in outstanding municipal bonds, which hold the lowest investment grade rating from major rating agencies. Its debt has long been held in municipal bond funds because its bonds are exempt from local, state, and federal taxes, but investor concerns have grown.

Another aspect of this bond debacle is marketing of the bonds by some brokerage firms, notably UBS. We are prosecuting and investigating claims against UBS for those practices, as well as other broker dealers, who may not have properly disclosed the risks in the Puerto Rico bonds.

For more information - Puerto Rico seeks to calm rattled muni bond investors

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Sallah Astarita & Cox Reviewing Potential Claims Against Other Brokerage Firms for Investments in Puerto Rico Municipal Bonds

Our office has learned that at least one State Attorney General is requesting information from multiple brokerage firms regarding the possible use, or overuse, of municipal bonds from Puerto Rico as part of their proprietary mutual funds. We are following those investigations for potential recovery for investors who have suffered municipal bond losses.

We are currently investigating claims against UBS in its Puerto Rico Bond debacle. That investigation is focused more on sales practices and the use of the bonds, and how same were presented to investors. We blogged about the UBS Puerto Rico Bond Funds earlier in the week.

This new, broader investigation, has a different focus, and involves multiple firms. Puerto Rico bond prices have been in a free fall amid renewed fears about the island's deficits, spending and high unemployment. The S&P Municipal Bond Puerto Rico Index is down 19 percent in 2013. The index is badly under-performing the S&P National AMT-Free Municipal Bond Index, which is down only 3.6 percent this year.

The bonds have been popular with portfolio managers because they are triple tax exempt - they are exempt from federal, state and local income tax in all US states. However, questions are now being raised as to whether the Puerto Rico bonds were over-used in the mutual fund portfolios, and whether investors were advised of the additional risks being incurred by the inclusion of the Puerto Rico bonds in the portfolio.

Investigators are looking into the disclosures by US brokerage firms as to the use of the bonds. It is believed that some funds have over 15% of their portfolio in Puerto Rico municipal bonds.

Investors who have suffered losses in a municipal bond portfolio are encouraged to contact our office for a no-obligation review of their holdings and potential claims. Email our office at info@sallahlaw.com, or call us at 212-509-6544.Related articles

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UBS Puerto Rico Bond Debacle Continues to Unfold

As we continue our work for investors into the disaster created by UBS Puerto Rico and its various Puerto Rico bond funds, additional facts are coming to light.

The funds involved are proprietary funds owned and managed by UBS. However, many investors apparently relied on advice from UBS to invest in the funds, which are leveraged, and then to borrow money against the bonds. Other investors were allegedly encouraged to borrow money to buy the bonds, and they borrowed the money from a UBS affiliate! When the bonds declined in value, the UBS affiliate demanded repayment of the related loan, which the investors could not pay, because the funds were in those very bonds, which had now declined in value.

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Qualcomm Exec and Merrill Lynch Broker Charged with Insider Trading

The SEC has charged a former Qualcomm executive and his Merrill Lynch broker with insider trading in an elaborate scheme involving family members and off shore brokerage accounts.

The Securities and Exchange Commission said that former Qualcomm executive Jing Wang and his advisor, Gary Yin, made illegal trades in his company’s stock and that of a company purchased by Qualcomm. From 2006 to 2012, Yin and Wang both set up offshore entities to disguise their trades and hide some $271,644 in total profit, according to a complaint filed in U.S. District Court for the Southern District of California.

According to the SEC, Yin helped Wang set up “sham brokerage accounts,” which were registered in the British Virgin Islands under family members’ names to disguise ownership. The complaint also alleges that Yin created his own offshore account in the British Virgin Islands under the name of his mother-in-law.

The two funneled money into those accounts in order to make trades based on information such as the announcement of a Qualcomm revenue revision and the company’s 2011 acquisition of Atheros Communications, the SEC alleges.

His Financial Advisor With Insider Trading For more information, see SEC.gov | SEC Charges Former Qualcomm Executive and His Financial Advisor With Insider Trading Through Secret Offshore Accounts

SEC Charges RIA For False Statements to Investors and Investigators - Parallel Criminal Charges Filed.

Why don't these defendants learn? When confronted by government investigators, either tell the truth or don't talk. Simple. But this basic concept seems to elude them.Case in point - the Securities and Exchange Commission charged the owner of a New York-based investment advisory firm with defrauding investors while grossly exaggerating the amount of assets under his management, and announced that the defendant has pled guilty to criminal charges which included charges that he lied to investigators.  

The SEC alleges that Fredrick D. Scott registered his firm ACI Capital Group as an investment adviser and then embarked on a series of fraudulent schemes targeting individual investors and small businesses.  Scott repeatedly touted ACI’s registration under the securities laws and falsely claimed the firm’s assets under management to be as high as $3.7 billion to bolster his credibility when offering too-good-to-be-true investment opportunities.  As Scott solicited funds from investors after promising them very high rates of return, he simply stole their money almost as soon as they deposited it with ACI.  Scott paid no returns to investors and illegally used their money to fund such personal expenses as his children’s private school tuition, air travel and hotels, department store purchases, and several thousand dollars in dental bills.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York announced Scott has pleaded guilty to criminal charges.  Among the charges to which Scott has pleaded guilty is making false statements to SEC examiners when they questioned whether Scott and ACI had accepted loans from investors. 

SEC examiners notified the agency’s Enforcement Division, which began investigating and referred the matter to criminal authorities. “Scott told brazen lies about the value of ACI’s assets under management and its ability to deliver huge returns on various investments,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Our examination and enforcement staff aggressively pursue investment advisers who flout the registration provisions of the securities laws for their personal gain, especially those who attempt to cover up their misdeeds by flat-out lying to our examiners.”

According to the SEC’s complaint filed in federal court in Brooklyn, one variation of Scott’s fraud was a so-called advance fee scheme – Scott promised investors that ACI would provide multi-million dollar loans to people seeking bank financing.  But investors were told that they first needed to advance ACI a percentage of the loan amount, and once they did so they would receive the remaining balance of the amount that Scott promised to pay.  Scott had no intention of ever returning the money, nor did he repay it.

The SEC alleges that in another iteration of his fraud, Scott offered investors the opportunity to make a bridge loan to a third-party entity.  The investor was told to fund one portion of the loan, and ACI would supposedly fund the remaining balance.  In exchange, the investor would supposedly receive a substantial return on his initial investment.  In this scheme as with each of his others, investors never received returns and Scott stole the money.

The SEC’s complaint charges Scott with violating Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5, Section 207 of the Investment Advisers Act for filing a false Form ADV, and aiding and abetting ACI’s improper registration in violation of Section 203A of the Advisers Act.

More information is available at the SEC's site and the complaint is also online.

Money Manager Charged With Defrauding Investors and Firms

The SEC has charged a purported money manager in New York with conducting a free-riding scheme to defraud three brokerage firms, and then bilking several investors out of nearly a half-million dollars that he stole to fund his luxurious lifestyle that included a Bentley automobile, summers in the Hamptons, and casino junkets.
The SEC alleges that Ronald Feldstein caused more than $2 million in losses for the brokerage firms that he victimized in the free-riding scheme, which occurs when customers buy or sell securities in their brokerage accounts without having the money or shares to actually pay for them.  Feldstein opened three separate brokerage accounts in the names of two purported investment funds that he created.  He had no intention to pay for the stocks that he purchased if they resulted in big losses.  Feldstein planned to walk away from any transactions where the price declined substantially after the trade date, and planned to use sales proceeds to pay for the purchases if the price of a stock increased.
The SEC further alleges that Feldstein later began soliciting investments by targeting owners of businesses that he had frequented for decades, including a dry cleaner and a car leasing and servicing company.  Feldstein convinced them to provide funds for him to invest on their behalf, promising such profitable opportunities as a successful hedge fund, a promising penny stock, and an initial public offering (IPO) of a fashion company.  However, Feldstein never invested this money, instead converting it for his personal use without their knowledge.

“Without sufficient assets to pay for his stock purchases, Feldstein illegally arranged trades in which he got the profits if he won and left brokerage firms holding the bag if he lost.”
-Andrew M. Calamari, Director of the SEC’s New York Regional Office. 

The complaint does not address how this scheme was discovered, or why the free-riding scheme went undetected for any period of time. Brokerage firms have the obligation to detect free-riding and to take steps to prevent such activities. My firm has the experience to assist firms in creating such compliance systems, as well as assisting firms, and investors, in recovering losses from fraudulent investment practices.
Give us a call at 212-509-6544. We represent all market participants, nationwide.
SEC.gov | SEC Charges Purported Money Manager With Defrauding Investors and Brokerage Firms

London Whale Supervisor Arrested

Spanish police arrested former JP Morgan Chase trader Javier Martin-Artajo on Tuesday as he prepares to fight possible extradition to the United States over a $6.2 billion financial scandal at the United States' largest bank. The arrest came after the United States charged Spaniard Martin-Artajo and a junior colleague, Frenchman Julien Grout, with wire fraud and conspiracy to falsify books and records related to the trading losses

For more detail see - JPMorgan's former 'London Whale' supervisor arrested in Spain

Two JPMorgan Employees Face Criminal Charges in the London Whale Case

The "London whale" trading scandal that forced JP Morgan to book a $6.2 billion loss took a new turn on Wednesday as U.S. authorities announced criminal charges against two of the bank's employees.

US charges two in JP Morgan 'whale' case - NBC News.com

Cell Phones Do Not Avoid Insider Trading Charges

While we have successfully defended professionals and investors in insider trading cases, those defenses are usually based on the fact that the client did not trade on such information. We do not win such cases because the investor hid his trading activity, but it is interesting to see what those trading on inside information do in order to avoid detection.

The most recent example, the SEC announced insider trading charges against a former systems administrator at Vermont-based Green Mountain Coffee Roasters who repeatedly obtained quarterly earnings data and traded in advance of its public release. According to the Commission, they traded out of the money options before earnings announcements and gained $7 million dollars in profits. The Commission alleges that they communicated with each other by voice and text messages using their wives' cellphones.

Pretty clever. No one would ever think of issuing a subpoena for my wife's cell phone in an insider trading investigation!

None of this works. First, let's keep in mind that the Commission and the exchanges have extensive records of trading activity. The regulators know, at a minimum, which brokerage firm had clients purchasing stock, or options, in the days, weeks, or even months leading up to an event. It is not difficult for the regulators to issue requests to the firms for the identity of the customer who made suspicious purchases.

From there the SEC Staff issues a document request to the customer, his brokerage firm, and ultimately his bank, his telephone company and any other entity, following the money. Ultimately the Staff takes the customer's testimony under oath,

At that time, the customer is faced with a choice - assist the investigation and testify, or refuse to testify and assert his rights under the Fifth Amendment. The latter choice is not always the right choice, and there are complications in doing so, but it is an option, and one that we sometimes recommend to our clients. Of course,there is a third choice - testify and lie - but that is not an option, as many targets of investigations have found, including Martha Stewart. She did a year for obstruction, and then settled the insider trading case.

The reality is that if you are going to trade on inside information, you are probably going to get caught, and if you are not trading on inside information, you don't have to go through hoops to hide your activity. In this case, this team of investors correctly predicted the company's stock price reaction to 12 of the past 13 quarterly earnings announcements. I once had a federal court judge tell me, during an insider trading trial, that "you don't pull a royal flush in 4 out of 5 poker hands." So too here.

But what I found interesting was the that the SEC alleges that as an information technology employee, McGinnis had access to shared folders on Green Mountain Coffee’s computer server where drafts of pending press releases and earnings announcements were stored.  He also had access to other employees’ e-mail accounts.  Both sources provided McGinnis with details about upcoming Green Mountain Coffee earnings announcements before they became public.

Plus, although the technology officer lives in Vermont, and his partner lives in Connecticut, according to the SEC, much of the insider trading in their online brokerage accounts occurred through McGinnis’ home Internet service.  They communicated frequently around earnings announcements, but infrequently otherwise.
But I am sure they thought they were being clever, according to the SEC, around trading times, they exchanged numerous phone calls and text messages  using cell phones belonging to their spouses.
It doesn't work. The SEC will figure it out eventually, and when they do, the penalty is THREE TIMES your profits. Not three times your net trading profits; three times the profit on the trades that the SEC says were made with inside information. They ignore the losers, by the way.

The solution? The obvious one is not to trade on inside information. More importantly, be careful when you trade on tips received from friends or colleagues, and document the trades that you do make. And if you are in the unfortunate position of being investigated for insider trading, retain an experienced securities attorney at the start of the investigation. Do not go it alone, the downside, which can include criminal charges, are simply too great.

SEC.gov | SEC Charges Former Green Mountain Coffee Employee And Friend In $7 Million Insider Trading Scheme

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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 insider trading investigations and enforcement actions. We represent investors, financial professionals and investment firms nationwide. For more information contact Mark Astarita at 212-509-6544 or at mja@sallahlaw.com

• More posts on insider trading at The Securities Law Blog, including SEC Loses Insider Trading Trial

JP Morgan Facing Criminal and Civil Charges For Mortgage Security Fraud

On the heels of the announcement of charges against Bank of America for fraudulently selling investors mortgage backed securities, JPMorgan Chase disclosed on Wednesday that it faced a criminal and civil investigation into whether it sold shoddy mortgage securities to investors in the run-up to the financial crisis,

According to the New York Times, JPMorgan has acknowledged fthe existence of the investigation — one of several mortgage-related problems looming for the bank — in a quarterly regulatory filing. It said that the civil division of the United States attorney’s office for the Eastern District of California, has “preliminarily concluded” that JPMorgan flouted federal laws with its sale of subprime mortgage securities from 2005 to 2007. The parallel criminal inquiry, according to one person briefed on the matter, is in a more preliminary stage.

Adding to scrutiny of the bank, the NYT is also reporting that federal prosecutors in Philadelphia are examining whether JPMorgan duped investors into buying troubled mortgage securities that later imploded, The prosecutors are investigating whether JPMorgan churned out the mortgage-backed securities without ensuring that the investments met underwriting standards,

Representatives for the bank and the federal prosecutors declined to comment.

For more information - JPMorgan Reveals It Faces Criminal and Civil Inquiries
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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 representation of individual and institutional investors who have been defrauded. We represent investors, financial professionals and investment firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at email us

SEC Halts Ex-Marine’s Fraud

The Securities and Exchange Commission today obtained an emergency court order to halt a hedge fund investment scheme by a former Marine living in the Chicago area who has been masquerading as a successful trader to defraud fellow veterans, current military, and other investors.

The SEC alleges that Clayton A. Cohn and his hedge fund management firm Market Action Advisors raised nearly $1.8 million from investors through a hedge fund he managed.  Cohn lied to investors about his success as a trader, the performance of the hedge fund, his use of investor proceeds, and his personal stake in the hedge fund.  Cohn only invested less than half of the money raised from investors and instead used more than $400,000 for such personal expenses as a Hollywood mansion, luxury automobile, and extravagant tabs at high-end nightclubs. He used his lavish lifestyle to carefully contrive the image of a successful trader and investor, when in reality he lost nearly all of the money invested through the hedge fund.

In order to cover up his fraud and continue raising money from investors, Cohn generated phony hedge fund account statements showing annual returns exceeding 200 percent. “Cohn lured fellow military and other investors into his hedge fund by portraying himself as a successful trader who generated massive returns for his investors,” said Timothy L. Warren, Acting Director of the Chicago Regional Office.  “But Cohn’s hedge fund investors didn't have a chance to make a profit since he never invested most of their money and promptly lost the portion he did invest.”

According to the SEC’s complaint filed in federal court in Chicago, Cohn targets mostly unsophisticated investors and has solicited friends, family members, and fellow veterans to invest in his hedge fund.  Cohn controls a so-called charity called the Veterans Financial Education Network (VFEN) that purports to teach veterans how to understand and manage their money.  Cohn has touted his Marine Corps pedigree in VFEN press releases and encourages veterans to find “a money-manager who is both trustworthy and knows what he is doing.” VFEN’s website identifies Cohn as a money manager who “manages millions of dollars.”
According to the SEC’s complaint, Cohn managed his hedge fund Market Action Capital Management through his investment advisory firm Market Action Advisors, which is registered with the state of Illinois.  Cohn solicited investments by falsely claiming that he had major success as a personal trader and invested $1.5 million of his own money in the hedge fund.  He also misrepresented that an accounting firm would audit the hedge fund’s financial statements.

The SEC alleges that Cohn had a record of trading losses, invested no more than $4,000 of his own money, and absconded with far more money for his personal expenses.  The audit firm named by Cohn never agreed to audit the fund’s financial statements.  Cohn continued to deceive investors after their initial investment by issuing account statements that showed annual returns of more than 200 percent for 2012 when the hedge fund actually lost money.   The SEC’s complaint charges Cohn and Market Action Advisors with violating the antifraud provisions of the federal securities laws.  The court granted the SEC’s request for emergency relief including a temporary restraining order and asset freeze.  The SEC further seeks permanent injunctions, disgorgement of ill-gotten gains, and financial penalties from Cohn and Market Action Advisors.

For more information - SEC.gov | SEC Halts Ex-Marine’s Hedge Fund Fraud Targeting Fellow Military
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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 and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or at email us

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