More Insider Trading Follies - This Time Professional Baseball Players!

 The Securities and Exchange Commission announced a second round of charges in an insider trading case involving former professional baseball players and the former top executive at a California-based medical eye products company that was the subject of the illegal trading.

The SEC brought initial charges in the case last year, accusing former professional baseball player Doug DeCinces and three others of insider trading on confidential information ahead of an acquisition of Advanced Medical Optics Inc. DeCinces and his three tippees made more than $1.7 million in illegal profits, and they agreed to pay more than $3.3 million to settle the SEC’s charges.

Now the SEC is charging the source of those illegal tips about the impending transaction – DeCinces’s close friend and neighbor James V. Mazzo, who was the Chairman and CEO of Advanced Medical Optics. The SEC also is charging two others who traded on inside information that DeCinces tipped to them – DeCinces’ former Baltimore Orioles teammate Eddie Murray and another friend David L. Parker, who is a businessman living in Utah.

The SEC alleges that Murray made approximately $235,314 in illegal profits after Illinois-based Abbott Laboratories Inc. publicly announced its plan to purchase Advanced Medical Optics through a tender offer. Murray agreed to settle the SEC’s charges by paying $358,151. The SEC’s case continues against Parker and Mazzo, the latter of whom was directly involved in the tender offer and tipped the confidential information to DeCinces along the way.

“It is truly disappointing when role models, particularly those who have achieved so much in their professional careers, give in to the temptation of easy money,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit and Director of the Philadelphia Regional Office. “Mazzo had repeated personal contacts and communications with DeCinces, who promptly traded and tipped Murray, Parker and others that a deal involving Mazzo’s company was imminent. CEOs and other employees of public companies must resist the lure of sharing confidential information with their friends and always put the interests of their shareholders and company first.”

For more details see the SEC's Press Release New Charges in Insider Trading Case Include Former CEO and Professional Baseball Player

FINRA Small Firm Board Candidates Unload on the SRO

There are three candidates for one of the small firm seats on the FINRA Board of Directors, and they are taking aim at FINRA.

I have written about FINRA's unfair, or uneven, policies where small firms are treated more harshly than larger firms, and it is clearly a problem. Adding three small firm seats to the board did not help, but maybe this spotlight on FINRA will be a move in the right direction.

There is more at InvestmentNews.com...

FINRA Targeting Small Firms and Individual Brokers?

Verizon Can No Longer Charge for Tethering - FCC

The FCC has ruled that Verizon can not charge users an extra fee to tether their 4g phones and tablets. The 1.25 million dollar fine goes to to the US Treasury, not to individual users.

Verizon Wireless To Pay $1.25 Million To Settle Investigation | FCC.gov

Fighting FINRA and the SEC

Securities litigators have always debated the concept of whether or not to take FINRA or the SEC to the mat in enforcement proceedings. After all, the downside is significant for our clients, the costs are significant, and there is this thought that the regulators do not bring cases that they will lose. After all, they have the ability to investigate the charges, in a private setting, for years, and can select the case that they want to bring. I have written about it before - Taking the SEC To Trial.

On the defense side, we do not have that luxury, and cannot force a regulator to litigate a case - or can we?

In recent years there has been an anecdotal trend towards fighting FINRA and the SEC. Years ago when the NASD changed the structure of its hearing panels, we think we saw an increase in decisions in favor of the broker or firm. We never seem to have a full set of statistics, but over recent years, we have seen evidence of FINRA and the SEC losing more often.

Just a few months ago I successfully represented a broker in a FINRA enforcement proceeding. For a variety of reasons we had to go to a hearing, and we did. FINRA came at my client with all the vigor it could muster, for a case that did not warrant half the time and effort. My client was accused of mis-marking order tickets - to the benefit of his customers, with the knowledge of his firm.

A silly case, it truly was, but FINRA would not back off, and there was a risk for my client.  If FINRA had prevailed my client would have received a significant suspension, a fine, a regulatory mark on his license, and other collateral damage. But it was a winnable case for us.

And we did win. After two days of hearing, and multiple submissions, the Hearing Panel dismissed the complaint against my client. My new colleague, Jim Sallah in Florida represented a client in an SEC insider trading case last year, and won - case dismissed, and earlier last year took a FINRA enforcement to trial and won.

But again, this is anecdotal. However, today Sutherland Asbill & Brennan LLP today announced the results of its 2012 Sutherland SEC/FINRA Litigation Study – an annual review of the litigated cases brought by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) against broker-dealers and associated persons. 

The study demonstrates that while most firms and individuals choose to settle, litigation is often a wiser choice. The attorneys analyzed cases in Fiscal Year (FY) 2011 and the first half of FY 2012 (October 2010 through March 2012) and found that:

• 15% of all litigated SEC and FINRA charges were dismissed. When represented by counsel, FINRA respondents were successful almost 20% of the time.
• Nearly 1/3 of the time, the administrative law judge (ALJ) or the Hearing Panel imposed lower monetary sanctions than the SEC or FINRA prosecutors sought.
• In FINRA hearings, 50% of the time Hearing Panels imposed shorter suspensions and 33% of the time Hearing Panels imposed lower monetary sanctions than those sought by FINRA staff.
• Nearly 43% of SEC respondents were successful in getting charges dismissed or sanctions reduced when they appealed to the Commission from an Administrative Law Judge decision. 

While there still needs to be a case by case decision, clearly fighting might be the way to go for more than a handful of cases. 

Related articles

• FINRA Respondent Wins Case, Now Running for FINRA Board
• Taking the SEC To Trial
• Wall Street's Captive Arbitrators Strike Again 
• Securities regulator FINRA lost $84 million in 2011

How to Hire an Attorney

Whether you are running a small business, or a financial advisor managing your practice, you need an attorney. You don't need one every day, and in fact you might go months without needing him at all, but you need one. This article has some very good advice for what to look for, and what to ask, when hiring an attorney.

One mistake in the article - do not limit yourself to an attorney who is geographically nearby. While some business owners might need physical meetings on a regular basis, most do not. We do not meet in person with most of our clients, even the ones where we are in litigation. Personal meetings are fine, but they are also a waste of time. Today, with cellphones, email, fax and WebEx, the in-person meeting is less important than hiring the best attorney you can hire.

How to Hire an Attorney

UBS' Track Record of Averting Prosecution Coming to an End?

In recent years UBS has increasingly gained a reputation for being an bad firm.  The latest Libor rate scandal, which affected an untold number of customers, and their brokers, is just the most recent example.

The New York Times has picked up the story, and urges the Justice Department to consider the record of the Swiss banking giant. UBS is one of more than a dozen banks being investigated for manipulating interest rates for their own benefit. As the NYT correctly points out, at UBS, a series of immunity, nonprosecution and deferred prosecution agreements in recent years seems to have had scant, if any, deterrent effect.

As the article points out, UBS is not alone in its seemly never ending string of violations and charges, but in many ways, UBS is in a league of its own given its track record for scandals. UBS was deemed "too big to fail" in the financial crisis and had to be bailed out after a $50 BILLION write-down on mortgage backed securities.

The NYT has summarized its ability to escape criminal prosecution, presumably because of its status. However, the continued impact of its conduct on the investing public, its own brokers and employees, and the markets in general, cannot, and should not be ignored.

•  UBS obtained a deferred prosecution agreement in 2009 for conspiring to defraud the United States of tax revenue by creating more than 17,000 secret Swiss accounts for United States taxpayers who failed to declare income and committed tax fraud. UBS bankers trolled for wealthy clients susceptible to tax evasion schemes at professional tennis matches, polo tournaments and celebrity events. One UBS banker smuggled diamonds in a toothpaste tube to accommodate a client. In return for the deferred prosecution agreement, UBS agreed to pay $780 million in fines and penalties and disclose the identities of many of its United States clients. At the same time it settled Securities and Exchange Commission charges that it acted as an unregistered broker-dealer and investment adviser to American clients and paid a $200 million fine. In October 2010 the government dropped the charges, saying UBS had fully complied with its obligations under the agreement. 

• In May 2011, UBS admitted that its employees had repeatedly conspired to rig bids in the municipal bond derivatives market over a five-year period, defrauding more than 100 municipalities and nonprofit organizations, and agreed to pay $160 million in fines and restitution. An S.E.C. official called UBS’s conduct “a ‘how to’ primer for bid-rigging and securities fraud.” UBS landed a nonprosecution agreement for that behavior, and the Justice Department lauded the bank’s “remedial efforts” to curb anticompetitive practices.

• In what the S.E.C. called at the time the largest settlement in its history, in 2008 UBS agreed to reimburse clients $22.7 billion to resolve charges that it defrauded customers who purchased auction-rate securities, which were sold by UBS as ultrasafe cash equivalents even though top UBS executives knew the market for the securities was collapsing. Seven of UBS’s top executives were said to have dumped their own holdings, totaling $21 million, even as they told the bank’s brokers to “mobilize the troops” and unload the securities on unsuspecting clients. As Andrew M. Cuomo, who was New York’s attorney general then, put it: “While thousands of UBS customers received no warning about the auction-rate securities market’s serious distress, David Shulman — one of the company’s top executives — used insider information to take the money and run.” Besides reimbursing clients and settling with the S.E.C., UBS paid a $150 million fine to settle consumer and securities fraud charges filed by New York and other states. It again escaped prosecution. 

There is more at the New York Times, read the entire article.
UBS’s Track Record of Averting Prosecution

Insider Trading? Why Not? This time a CEO and His Own Company's Stock!

The SEC charged the chairman and CEO of a Santa Ana, Calif.-based computer storage device company with insider trading in a secondary offering of his stock shares with knowledge of confidential information that a major customer’s demand for one of its most profitable products was turning out to be less than expected.

The SEC alleges that Manouchehr Moshayedi sought to take advantage of a dramatically upward trend in the stock price of STEC Inc. by deciding to sell a significant portion of his stock holdings as well as shares owned by his brother, a company co-founder. The secondary offering was set to coincide with the release of the company’s financial results for the second quarter of 2009 and its revenue guidance for the third quarter. However, in the days leading up to the secondary offering, Moshayedi learned critical nonpublic information that was likely to have a detrimental impact on the stock price. Moshayedi did not call off the offering and abstain from selling his shares once he possessed the negative information unbeknownst to the investing public. Instead, he engaged in a fraudulent scheme to hide the truth through a secret side deal, and proceeded with the sale of 9 million shares from which he and his brother reaped gross proceeds of approximately $134 million each.

SEC Charges CEO With Insider Trading in Secondary Offering of Company Stock

Short Sellers Settle SEC Claims

The SEC announced that two options traders who the agency charged earlier this year with short selling violations have agreed to pay more than $14.5 million to settle the case against them. According to the Commission an investigation found that brothers Jeffrey A. Wolfson and Robert A. Wolfson engaged in naked short selling by failing to locate shares involved in short sales and failing to close out the resulting failures to deliver.

SEC rules require short sellers to locate shares to borrow before selling them short, and they must purchase securities to close out their failures to deliver by a specified date.

According to the press release, the Wolfsons made approximately $9.5 million in illegal profits from their naked short selling transactions.

The SEC has more details in its press release.

More Insider Trading Follies - This Time, Physicians!

As I have said before, this is simply amazing.

We represent a fair number of investors who have been called to respond to SEC inquiries in connection with insider trading investigations. Maybe that is why I understand and appreciate the ability of the Commission to find those who trade on inside information and those who are not as familiar with such investigations do not have the same understanding.

To be sure, there is apparently a never ending series of investigations into insider trading, as well as lawsuits and settlements brought by the Commission. However, the SEC often casts a very wide net in its insider trading investigations, and many investors who are subpoenaed have valid reasons for their stock transactions, and did not trade while in possession of material non-public infomation.

Perhaps the SEC is not doing a very good job of educating investors that buying stock based on material non-public information is illegal. Whatever the reason, last week there was yet another SEC suit filed and settled.

This time is a a couple of doctors. In recent months we have had attorneys, a mutual fund manager, a Yahoo Executive, a Hollywood movie producer, and others (see our insider trading stories for the details).

According to the SEC press release and complaint, one doctor was the Chairman of the Board of American Physicians Capital, Inc. He knew that the Board was looking into selling the company, and later, that the firm was taking definitive steps to sell. The Commission alleged that this was material non-public information, and that the doctor shared that information with his friends and family. The Commission also alleges that they purchased $2.2 million of the company's stock based on that information. When the acquisition was announced, the shares closed up 28% over the previous day's close.

According to the Commission's press release, collectively, they made more than $623,000 in profits on their ACAP stock following the announcement.

Now for the real lesson in this matter. With $623,000 in profits, they agreed to pay the Commission over $1.9 MILLION dollars to settle the charges. Apparently this is something else that folks don't know - is a pretty settlement for an insider trading case - you give back your profits (without taking a credit for any losses) and then pay a penalty that is twice the amount of the profits. That is some pretty serious stuff, never mind that insider trading is also a crime.

Keep it in mind when you get that "hot tip" on a  stock. At the same time, even if you have a legitimate reason for purchasing the stock and the SEC comes calling, call an experienced securities attorney.

My number is 212-509-6544.

For more information see the press release. The insider trading complaint is also online. 

 Related articles

• Attorney, Trader and Middleman Settle SEC Charges in $32 Million Insider Trading Case
• Yahoo Executive and Mutual Fund Manager Charged With Insider Trading - Civil and Criminal.
• Japan Checking Possible Insider Trading of ANA, Official Says 
• China's securities regulator roots out insider trading

SEC Charges Peter Madoff with Fraud. US Attorney Files Criminal Charges As Well

Everyone knew that Bernard Madoff did not work alone. That would have been impossible.

The SEC has charged Peter Madoff, the brother of Bernie Madoff, with committing fraud, making false statements to regulators, and falsifying books and records in order to create the false appearance of a functioning compliance program over Madoff’s fraudulent investment advisory operations.

The SEC alleges that Peter Madoff, who served as Chief Compliance Officer and Senior Managing Director at Bernard L. Madoff Investment Securities LLC (BMIS) from 1969 to December 2008, created stacks of compliance documents setting out supposedly robust policies and procedures over BMIS’s investment advisory operations. However, Peter Madoff created these compliance manuals, written supervisory procedures, reports of annual compliance reviews, and compliance certifications to merely paper the file. No policies and procedures were ever implemented, and none of the reviews were actually performed even though Peter Madoff represented that he personally completed the reviews.

The U.S. Attorney’s Office for the Southern District of New York today announced parallel criminal charges against Peter Madoff. “Peter Madoff helped Bernie Madoff create the image of a functioning compliance program purportedly overseen by sophisticated financial professionals,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Tragically, the image was merely an illusion supported by Peter’s sham paperwork and false filings for which he was rewarded with tens of millions of dollars in stolen investor funds.”

SEC Charges Peter Madoff With Fraud and False Statements to Regulators

 

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• Peter Madoff Pleads Guilty in NYC, Blames Brother