North Carolina-Based Investment Adviser Charged for Misleading Fund Board of Directors

The Securities and Exchange Commission today announced charges against a North Carolina-based investment adviser and its former owner for misleading an investment fund’s board of directors about the firm’s ability to conduct algorithmic currency trading so they would approve the firm’s contract to manage the fund.

The SEC’s Enforcement Division alleges that Chariot Advisors LLC and Elliott L. Shifman misled the fund’s board about the nature, extent, and quality of services that the firm could provide as he touted the competitive benefits of algorithmic trading in two presentations before the board.  Contrary to what Shifman told the directors, Chariot Advisors did not devise or otherwise possess any algorithms capable of engaging in the currency trading that Shifman was describing.  After the fund was launched, Chariot Advisors did not use an algorithm model to perform the fund’s currency trading as represented to the board, but instead hired an individual trader who was allowed to use discretion on trade selection and execution.  The misconduct by Shifman and Chariot Advisors caused misrepresentations and omissions in the Chariot fund’s registration statement and prospectus filed with the SEC and viewed by investors.

The case arises out of an initiative by the SEC Enforcement Division’s Asset Management Unit to focus on the “15(c) process” – a reference to Section 15(c) of the Investment Company Act of 1940 that requires a registered fund’s board to annually evaluate the fund’s advisory agreements.  Advisers must provide the board with the truthful information necessary to make that evaluation.  Other enforcement actions taken against misconduct in the investment contract renewal process and fee arrangements include cases against Morgan Stanley Investment Management, a sub-adviser to the Malaysia Fund, and two mutual fund trusts affiliated with the Northern Lights Variable Trust fund complex.

“It is critical that investment advisers provide truthful information to the directors of the registered funds they advise,” said Julie M. Riewe, Co-Chief of SEC Enforcement Division’s Asset Management Unit.  “Both boards and advisers have fiduciary duties that must be fulfilled to ensure that a fund’s investors are not harmed.”

According to the SEC’s order instituting administrative proceedings, the false claims by Chariot and Shifman defrauded the Chariot Absolute Return Currency Portfolio, a fund that was formerly within the Northern Lights Variable Trust fund complex.  In December 2008 and again in May 2009, Shifman misrepresented to the Chariot fund’s board that his firm would implement the fund’s investment strategy by using a portion of the fund’s assets to engage in algorithmic currency trading.  Chariot fund’s initial investment objective was to achieve absolute positive returns in all market cycles by investing approximately 80 percent of the fund’s assets under management in short-term fixed income securities, and using the remaining 20 percent of the assets under management to engage in algorithmic currency trading.

According to the SEC’s order, Chariot Advisors did not have an algorithm capable of conducting such currency trading.  The ability to conduct currency trading was particularly significant for the Chariot fund’s performance, because in the absence of an operating history the directors focused instead on Chariot Advisors’ reliance on models when the board evaluated the advisory contract.  Even though Shifman believed that the fund’s currency trading needed to achieve a 25 to 30 percent return to succeed, Shifman never disclosed to the board that Chariot Advisors had no algorithm or model capable of achieving such a return.

According to the SEC’s order, because Chariot Advisors possessed no algorithm, currency trading for the fund was under the control of an individual trader who was not using an algorithm for at least the first two months after the fund’s launch.  Shifman had interviewed the trader prior to her hiring and knew that she used a technical analysis, rules-based approach for trading that combined market indicators with her own intuition.  The trader traded currencies for the fund until Sept. 30, 2009 when she was terminated due to poor trading performance. Subsequently, Chariot employed a third party who utilized an algorithm to conduct currency trading on behalf of the Chariot fund.

The SEC’s order alleges that the misconduct by Chariot and Shifman, who lives in the Raleigh area, resulted in violations of Sections 15(c) and 34(b) of the Investment Company Act of 1940 and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8.  A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the order are true and whether any remedial sanctions are appropriate.

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Winnetka-Resident Clayton Cohn Charged with Hedge Fund Fraud Targeting Military Members

Hedge Fund News from HedgeCo.Net

A hedge fund owned by Winnetka resident Clayton Cohn, 26, a U.S. Marine Corps veteran, was shut down by the Securities and Exchange Commission earlier this month. Cohn allegedly participated in hedge fund fraud that targeted current and former military service members, an article by Business Insider states.

According to the SEC, Cohn allegedly spent the money on investments in a 3-D adult film company and a hair extensions sales company, as well as a $10,000 per-month mansion in Los Angeles, a luxury sports car and “extravagant tabs” at high-end night clubs.

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Florida-Based Penny Stock Promoter Charged for Spearheading Illegal Kickback Schemes

Published by the U.S. SEC.

The Securities and Exchange Commission announced on August 14 the latest charges in a joint law enforcement crackdown on penny stock schemes with ties to the Florida region.

The SEC charged two microcap companies, their CEOs, and one penny stock promoter for spearheading illegal kickback schemes.  The SEC also charged two other microcap companies, their CEOs, and four other promoters with arranging the payment of bribes to hype the companies in which they had a stake in order to create a false sense of market activity and illegally generate stock sales.

“Interested only in lining their own pockets, these company officers and promoters used underhanded tactics to cheat investors and manipulate penny stocks” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “Their utter disregard for investors underscores the importance of stamping out microcap fraud.”

The SEC has worked closely with the U.S. Attorney’s Office for the Southern District of Florida and the Federal Bureau of Investigation’s Miami Division to uncover the penny stock schemes.  Parallel criminal charges were announced today against the same nine individuals facing SEC charges.

The SEC has now charged 40 individuals and 24 companies in this series of penny stock investigations.  The first actions were announced in October 2010.

The SEC’s complaints filed today in U.S. District Court for the Southern District of Florida charged the following penny stock companies and officers:

  • Health Sciences Group (HESG) formerly based in Indian Harbour, Fla., and now based in Newport Beach, Calif.
  • President and CEO Thomas Gaffney of Satellite Beach, Fla.
  • Nationwide Pharmassist Corp.based in Boca Raton, Fla.
  • CEO and Chairman Stephen F. Molinari of Boca Raton, Fla.
  • Redfin Network (RFNN) based in Fort Lauderdale, Fla.
  • President and CEO Jeffrey L. Schultz of Fort Lauderdale, Fla.
  • VHGI Holdings (VHGI) based in Fort Worth, Texas
  • CEO Douglas P. Martin of Wellington, Fla.

The SEC’s complaints charge the following penny stock promoters:

  • Mark Balbirer of Pompano Beach, Fla.
  • Jack Freedman of Fort Lauderdale, Fla.
  • Richard P. Greene of Davie, Fla.
  • Peter Santamaria of Coconut Creek, Fla.
  • Sheldon R. Simon of Palm Beach Gardens, Fla.

According to the SEC’s complaints, one of the schemes (Health Sciences Group/Gaffney) involved an arrangement to pay an undisclosed kickback to a pension fund manager in exchange for the fund’s purchase of restricted shares of stock in the company.  Two other schemes (Nationwide PharmAssist/Molinari and Balbirer) involved agreements to pay undisclosed kickbacks to hedge fund principals in return for their funds’ purchase of restricted shares.

The SEC’s complaints allege that other schemes involved the arrangement of inducement payments by officers or promoters of penny stock companies to coordinate the manipulation of their stock.  Those who arranged the payment of bribes to create fictitious market movement were Redfin Network/Schultz, VHGI/Martin, and promoters Greene, Santamaria, and Simon.  In his scheme, Freedman arranged to pay an undisclosed bribe to a stockbroker who agreed to purchase a microcap company’s stock in the open market for his customers’ discretionary accounts.

The SEC’s complaints allege that the companies, officers, and promoters violated Section 17(a)(1) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and/or 10b-5(c).  The SEC seeks financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and permanent injunctions.  The SEC also seeks penny stock bars against each of the officers and promoters, and officer-and-director bars against Gaffney, Martin, Molinari, and Schultz.

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Hedge Fund Victimized in Dreier $400M Fraud Scheme Recovers Funds

Published by Newsday on August 13, 2013

Eighteen contemporary artworks valued at  $33 million have been transferred to a hedge fund victimized in a massive $400 million fraud scheme, the Manhattan U.S. attorney’s office said Monday.

The works by such boldface artists as Andy Warhol, Mark Rothko and Damien Hirst had belonged to Marc Dreier, a once-prominent Manhattan lawyer whom prosecutors called “the Houdini of impersonation and false documents.”

Dreier is serving 20 years in the federal prison in Sandstone, Minn., after pleading guilty to money laundering and other charges in 2009. The scheme involved the sale of hundreds of millions of dollars in fake promissory notes to hedge funds.

U.S. marshals turned over the works, valued at some $33 million, to New York-based Heathfield Capital Ltd.

Some of the transferred works include Hirst’s “Elaidic Anhydride (hot pinks spot painting)”; Rothko’s “Untitled” and several of Warhol’s “Jackie” series of works on Jacqueline Kennedy.

In July, federal Judge Jed Rakoff upheld Heathfield’s right to the artworks that Dreier had pledged as security to complete a deal, calling the fund the “last and largest victims of Dreier’s fraud.”

Heathfield previously transferred $1.65 million in forfeited funds to the government, which will be made available to other victims of the scheme, prosecutors said.

Authorities say Dreier received $670 million between 2004 and 2008 from the sale of fictitious securities, spending much of it on a lavish lifestyle that included millions of dollars worth of art, beachfront homes on both coasts and a yacht.

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SEC Charges Bank of America With Fraud in RMBS Offering

The Securities and Exchange Commission charged Bank of America and two subsidiaries with defrauding investors in an offering of residential mortgage-backed securities (RMBS) by failing to disclose key risks and misrepresenting facts about the underlying mortgages.

The SEC alleges that Bank of America failed to tell investors that more than 70 percent of the mortgages backing the offering – called BOAMS 2008-A – originated through the bank’s “wholesale” channel of mortgage brokers unaffiliated with Bank of America entities.  Bank of America knew that such wholesale channel loans – described by Bank of America’s then-CEO as “toxic waste” – presented vastly greater risks of severe delinquencies, early defaults, underwriting defects, and prepayment.  These risks all directly impact the returns to RMBS investors, however Bank of America only selectively disclosed the percentage of wholesale channel loans to a limited group of institutional investors.  Bank of America never disclosed this material information to all investors and never filed it publicly as required under the federal securities laws.

“In its own words, Bank of America ‘shifted the risk’ of loss from its own books to unsuspecting investors, and then ignored its responsibility to make a full and accurate disclosure to all investors equally,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement.  “This is one in a long line of RMBS-related enforcement actions brought by the SEC to hold entities accountable for wrongdoing connected to the financial crisis.”

The Department of Justice today announced a parallel civil action against Bank of America for violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).

According to the SEC’s complaint filed in U.S. District Court for the Western District of North Carolina, Bank of America along with Banc of America Securities LLC (now Merrill Lynch, Pierce, Fenner & Smith) and Bank of America Mortgage Securities (BOAMS) conducted the $855 million RMBS offering in 2008.  BOAMS 2008-A was offered and sold as a “prime” securitization appropriate for the most conservative RMBS investors.

The SEC alleges that Bank of America deceived investors about the underlying risks as well as the underwriting quality of the mortgages, misrepresenting that the mortgage loans backing BOAMS 2008-A were underwritten in conformity with the bank’s own guidelines.  These mortgage loans, however, were riddled with ineligible appraisals, unsupported statements of income, misrepresentations regarding owner occupancy, and evidence of mortgage fraud.  The key ratios of debt-to-income and original-combined-loan-to-value were routinely miscalculated, and then the materially inaccurate ratios were provided to the investing public.

According to the SEC’s complaint, a disproportionate concentration of high-risk wholesale loans and the inclusion of a material number of loans failing to comply with internal underwriting guidelines resulted in BOAMS 2008-A suffering an 8.05 percent cumulative net loss rate through June 2013 – the greatest loss rate of any comparable BOAMS securitization.  This resulted in losses of nearly $70 million with anticipated future losses of approximately $50 million.  Bank of America’s repeated failures violated Sections 5(b)(1), 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

The SEC’s investigation was conducted by Mark Eric Harrison and Lucy T. Graetz of the Enforcement Division’s Structured and New Products Unit and the Atlanta Regional Office, under the supervision of Assistant Regional Director Aaron W. Lipson.  The litigation will be led by Senior Trial Counsel Kristin B. Wilhelm, Regional Trial Counsel Graham Loomis, and Mr. Harrison.  The Enforcement Division was assisted in its investigation by the SEC’s Division of Corporation Finance, including Rolaine Bancroft, Michelle Stasny, Mary Kosterlitz and Jennifer Ours.

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Two Investment Advisers Sanctioned for Best Execution Failures

The Securities and Exchange Commission today sanctioned two investment advisory firms for failing to seek best execution on client trades placed with their in-house brokerage divisions.

An SEC investigation found that New York-based A.R. Schmeidler & Co. (ARS), which is dually registered as an investment adviser and a broker-dealer, failed to reevaluate whether it was providing best execution for its advisory clients when it negotiated more favorable terms with its clearing firm.  This resulted in ARS retaining a greater share of the commissions it received from clients.  The firm failed to implement policies and procedures reasonably designed to prevent its best execution violations.
ARS agreed to pay more than $1 million to settle the charges.

A separate SEC investigation found that Gregory W. Goelzer and his Indianapolis-based dually registered firm Goelzer Investment Management (GIM) made misrepresentations in its Form ADV about the process of selecting itself as broker for advisory clients.  The firm failed to seek best execution for its clients by neglecting to conduct the comparative analysis of brokerage options described in its Form ADV, and recommended itself as broker for its advisory clients without evaluating other introducing-broker options as the firm represented it would.

Goelzer and GIM agreed to pay nearly $500,000 to settle the charges.

“These cases send a clear message to dually registered investment advisers and broker-dealers about our expectations in connection with their best execution analysis,” said Andrew Ceresney, Co-Director of the SEC’s Division of Enforcement.  “Investment advisers must carefully analyze whether their clients are obtaining the most beneficial terms reasonably available for their orders, particularly if those orders are executed through affiliated broker-dealers.  We will hold accountable those advisers who fail to do so.”

Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, added, “There is a clear conflict of interest when investment advisers execute client trades through their broker-dealer arm.  The unit is focused on pursuing dually registered firms that fail to address this conflict through robust disclosure, best execution analysis, and compliance procedures.”
ARS agreed to pay disgorgement of $757,876.88, prejudgment interest of $78,688.57, and a penalty of $175,000.  The firm also must engage an independent compliance consultant.  Without admitting or denying the SEC’s findings, ARS consented to a censure and cease-and-desist order.

GIM agreed to pay disgorgement of $309,994, prejudgment interest of $53,799, and a penalty of $100,000.  The firm must comply with certain undertakings, including the continued use of a compliance consultant and the separation of its chief compliance officer position from the firm’s business function.  Goelzer agreed to pay a $35,000 penalty.  Without admitting or denying the SEC’s findings, Goelzer and GIM also consented to censures and cease-and-desist orders.

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SEC Charges Texas Man With Running Bitcoin-Denominated Ponzi Scheme

The Securities and Exchange Commission today charged a Texas man and his company with defrauding investors in a Ponzi scheme involving Bitcoin, a virtual currency traded on online exchanges for conventional currencies like the U.S. dollar or used to purchase goods or services online.

The SEC alleges that Trendon T. Shavers, who is the founder and operator of Bitcoin Savings and Trust (BTCST), offered and sold Bitcoin-denominated investments through the Internet using the monikers “Pirate” and “pirateat40.”  Shavers raised at least 700,000 Bitcoin in BTCST investments, which amounted to more than $4.5 million based on the average price of Bitcoin in 2011 and 2012 when the investments were offered and sold.  Today the value of 700,000 Bitcoin exceeds $60 million.

The SEC alleges that Shavers promised investors up to 7 percent weekly interest based on BTCST’s Bitcoin market arbitrage activity, which supposedly included selling to individuals who wished to buy Bitcoin “off the radar” in quick fashion or large quantities.  In reality, BTCST was a sham and a Ponzi scheme in which Shavers used Bitcoin from new investors to make purported interest payments and cover investor withdrawals on outstanding BTCST investments.  Shavers also diverted investors’ Bitcoin for day trading in his account on a Bitcoin currency exchange, and exchanged investors’ Bitcoin for U.S. dollars to pay his personal expenses.

The SEC issued an investor alert today warning investors about the dangers of potential investment scams involving virtual currencies promoted through the Internet.

“Fraudsters are not beyond the reach of the SEC just because they use Bitcoin or another virtual currency to mislead investors and violate the federal securities laws,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Shavers preyed on investors in an online forum by claiming his investments carried no risk and huge profits for them while his true intentions were rooted in nothing more than personal greed.”

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of Texas, Shavers sold BTCST investments over the Internet to investors in such states as Connecticut, Hawaii, Illinois, Louisiana, Massachusetts, North Carolina, and Pennsylvania.  Shavers posted general solicitations on a website dedicated to Bitcoin discussions, and he misled investors with such false assurances about his investment opportunity as “It’s growing, it’s growing!” and “I have yet to come close to taking a loss on any deal,” and “risk is almost 0.”  Contrary to the representations made to investors, BTCST was not in the business of buying and selling Bitcoin at all.

The SEC alleges that Shavers, who lives in McKinney, Texas, paid 507,148 Bitcoin in investor withdrawals and purported interest payments.  He transferred at least 150,649 Bitcoin to his personal account at an online Bitcoin currency exchange.  Shavers suffered a net loss from his day trading, but realized net proceeds of $164,758 from his sales of 86,202 Bitcoin.  Shavers transferred $147,102 from his personal account at the online Bitcoin currency exchange to accounts he controlled at an online payment processor as well as his personal checking account.  He used this money to pay his rent, utilities, and car-related expenses as well as for food and retail purchases and gambling.

The SEC’s complaint charges Shavers and BTCST with offering and selling investments in violation of the anti-fraud and registration provisions of the securities laws, specifically 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 Exchange Act Rule 10b-5.  The SEC is seeking a court order to freeze the assets of Shavers and BTCST in addition to other relief, including permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

The SEC’s investor alert, prepared by the agency’s Office of Investor Education and Advocacy, recommends that investors be wary of so-called investment opportunities that promise high rates of return with little or no risk, especially when dealing with unregistered, Internet-based investments sold by unlicensed promoters.

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SEC Charges Hedge Fund Manager With Failing to Supervise Hedge Fund Portfolio Managers

The Securities and Exchange Commission announced charges against hedge fund adviser Steven A. Cohen for failing to supervise two senior employees and prevent them from insider trading under his watch.

The SEC’s Division of Enforcement alleges that Cohen received highly suspicious information that should have caused any reasonable hedge fund manager to investigate the basis for trades made by two portfolio managers who reported to him – Mathew Martoma and Michael Steinberg.  Cohen ignored the red flags and allowed Martoma and Steinberg to execute the trades.  Instead of scrutinizing their conduct, Cohen praised Steinberg for his role in the suspicious trading and rewarded Martoma with a $9 million bonus for his work.  Cohen’s hedge funds earned profits and avoided losses of more than $275 million as a result of the illegal trades.

“Hedge fund managers are responsible for exercising appropriate supervision over their employees to ensure that their firms comply with the securities laws,” said Andrew J. Ceresney, Co-Director of the SEC’s Division of Enforcement.  “After learning about red flags indicating potential insider trading by his employees, Steven Cohen allegedly failed to follow up to prevent violations of the law.  In addition to the more than $615 million his firm has already agreed to pay for the alleged insider trading, the Enforcement Division is seeking to bar Cohen from overseeing investor funds.”

According to the SEC’s order instituting administrative proceedings against Cohen, portfolio managers Martoma and Steinberg obtained material non-public information about publicly traded companies in 2008, and they traded on the basis of that information.  The SEC charged Martoma and his tipper with insider trading in an enforcement action last year, and charged Steinberg with insider trading in a complaint filed earlier this year.  In connection with those cases, CR Intrinsic, an affiliate of Cohen’s firm S.A.C. Capital Advisors, agreed to pay more than $600 million in the largest-ever insider trading settlement.  Another Cohen affiliate, Sigma Capital, agreed to pay nearly $14 million to settle insider trading charges.

The SEC’s investigation found that in his supervisory role, Cohen oversaw trading by Martoma and Steinberg and required them to update him on their stock trading and convey the reasons for their trades.  On at least two separate occasions in 2008, they provided information to Cohen indicating their potential access to inside information to support their trading.  However, Cohen stood by on both occasions instead of ascertaining whether insider trading was taking place.

According to the SEC’s order, Cohen watched Martoma build a massive long position in the stock of two pharmaceutical companies – Elan and Wyeth – based on their joint clinical trial of a drug with the potential to treat Alzheimer’s disease.  Cohen allowed this despite repeated e-mails and instant messages to Cohen from other analysts at CR Intrinsic advocating against it.  The analysts questioned whether Martoma possessed undisclosed data on the results of the trial.  Cohen responded by saying it was “tough” to know whether Martoma knew something, but that he would follow Martoma’s advice because he was “closer to it than you.”  In later exchanges of instant messages, Cohen further remarked that it “seems like mat [Martoma] has a lot of good relationships in this arena.”  Cohen also was told about a doctor who had provided his portfolio managers with potentially non-public information about the clinical trial, but failed to express any concern about the use of that information.  During his e-mail exchanges, Cohen displayed no concern that Martoma might possess non-public information or about his use of such information to inform investment decisions at his firm.  Instead, Cohen encouraged Martoma to talk further with a doctor familiar with the clinical trial.

The SEC’s Enforcement Division alleges that after months of building up the massive position and being bullish on both Elan and Wyeth, Martoma had a 20-minute phone conversation with Cohen on July 20, 2008.  According to Cohen, Martoma said that he was no longer comfortable with the Elan investments that CR Intrinsic and SAC held.  Despite Martoma’s abrupt change in view and red flags that he likely received confidential information about the clinical trials from a tipper, Cohen failed to take prompt action to determine whether an employee under his supervision was violating insider trading laws.  Starting the next morning, Cohen oversaw the liquidation of his and Martoma’s positions in Elan and Wyeth and the accumulation of a short position instead.

According to the SEC’s order, Cohen also supervised Steinberg while he was involved in insider trading of Dell securities in August 2008.  After being looped into a highly suspicious e-mail between Steinberg and other firm employees reflecting the clear possibility that they possessed material non-public information about an upcoming earnings announcement at Dell, Cohen again failed to take prompt action to determine whether Steinberg was engaged in unlawful insider trading.  Instead, Cohen liquidated his Dell shares based on the recommendation of Steinberg, who continued short selling Dell shares in his Sigma Capital portfolio based on the confidential information.  Dell’s stock price dropped sharply after its August 28 earnings announcement, and funds managed by Cohen’s firms profited or avoided losses totaling at least $1.7 million.  Three hours after the earnings announcement, Cohen e-mailed Steinberg: “Nice job on Dell.”

The SEC’s Division of Enforcement alleges that by engaging in the conduct described in the SEC’s order, Cohen failed reasonably to supervise Martoma and Steinberg with a view to preventing their violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.  The administrative proceedings will determine what relief is in the public interest against Cohen, including financial penalties, a supervisory and financial services industry bar, and other relief.

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Former Goldman Sachs Board Member to Pay $13M for Illegally Tipping Corporate Secrets

As released by the SEC, Washington D.C., July 17, 2013

The Securities and Exchange Commission today obtained a $13.9 million penalty against former Goldman Sachs board member Rajat K. Gupta for illegally tipping corporate secrets to former hedge fund manager Raj Rajaratnam.  Gupta also is permanently barred from serving as an officer or director of a public company.

The SEC previously obtained a record $92.8 million penalty against Rajaratnam for prior insider trading charges.

“The sanctions imposed today send a clear message to board members who are entrusted with protecting the confidences of the companies they serve,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement.  “If you abuse your position by sharing confidential company information with friends and business associates in exchange for private gain, you will be prosecuted to the fullest extent by the SEC.”

In its complaint filed in late 2011, the SEC alleged that Gupta disclosed confidential information to Rajaratnam about Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs as well as nonpublic details about Goldman Sachs’ financial results for the second and fourth quarters of 2008.

In addition to imposing the financial penalty, the order issued today by the Honorable Jed S. Rakoff of the U.S. District Court for the Southern District of New York enjoins Gupta from future violations of the securities laws, and permanently bars him from acting as an officer or director of a public company and from associating with any broker, dealer, or investment adviser.

In a parallel criminal case arising out of the same facts, the SEC provided significant assistance to the U.S. Attorney’s Office for the Southern District of New York in its successful criminal prosecution of Gupta, who was found guilty on June 15, 2012, of one count of conspiracy to commit securities fraud and three counts of securities fraud.  Following the jury verdict, Gupta was sentenced on Oct. 24, 2012, to a term of imprisonment of two years followed by one year of supervised release, and ordered to pay a $5 million criminal fine.

On Dec. 26, 2012, the SEC obtained a final judgment ordering Rajaratnam to disgorge his share of the profits gained and losses avoided as a result of the insider trading based on Gupta’s tips, plus prejudgment interest.

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SEC Freezes Assets Of Insider Traders in Onyx Pharmaceuticals

The Securities and Exchange Commission today obtained an emergency court order to freeze the assets of traders using foreign accounts to reap approximately $4.6 million in potentially illegal profits by trading in advance of the Sunday, June 30, 2013 announcement that Onyx Pharmaceuticals, Inc. had received, but rejected an acquisition offer from Amgen, Inc.

The SEC alleges that unknown traders took risky bets that Onyx’s stock price would increase by purchasing call options on June 26, 27 and 28, the three trading days before the announcement. Through quick, cross country coordination between the agency’s Los Angeles and New York offices, the SEC took emergency action to freeze the traders’ assets before courts closed for the holiday.

“This action demonstrates that the SEC will not hesitate to freeze the assets of suspicious foreign traders when the timing and size of their trades indicate that they were misusing inside information, and use of foreign accounts will not dissuade us,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.

According to the SEC’s complaint filed in federal court in Manhattan, on June 30, 2013 Onyx announced that it had received, but rejected, an unsolicited proposal from Amgen to acquire all of Onyx’s outstanding shares and share equivalents for $120 per share in cash. The Announcement also stated that Onyx’s board of directors rejected Amgen’s proposal and that Onyx had authorized its financial advisors to contact potential acquirers who may have an interest in a transaction with Onyx. Amgen’s $120 per share price offer represented a 38% premium to Onyx’s closing share price on Friday June 28, 2013. The complaint further alleges that as a result of the announcement, Onyx’s share price increased from a close of $86.82 on over 51% on Monday July 1 compared with the prior trading day’s closing price, and that the trading volume of its stock increased by over 900% that day. The complaint alleges that the traders, as a result of these well-timed trades, collectively earned a profit of approximately $4.6 million in just three days.

The SEC alleges that certain unknown traders were in possession of material nonpublic information about the offer to acquire Onyx at a substantial premium over the stock price at the time they made thy purchased Onyx call options, many of which were out-of-the-money, in the three trading days before the announcement. According to the complaint, the timing and size of the trades were highly suspicious because they constituted large increases over the historical volume for those call options purchased.

The emergency court order obtained by the SEC freezes the traders’ assets related to the Onyx call options transactions and prohibits the traders from destroying any evidence. The SEC’s complaint charges the unknown traders with violating Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5. In addition to the emergency relief, the Commission is seeking a final judgment ordering the traders to disgorge their ill-gotten gains with interest, pay financial penalties, and permanently bar them from future violations.

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