Philadelphia-based Private Equity Firm Charged With Pay-to-Play Violations

As published by the United States Securities and Exchange Commission:

The Securities and Exchange Commission charged a Philadelphia-area private equity firm with violating “pay-to-play” rules by continuing to receive advisory fees from the city and state pension funds following campaign contributions made by an associate in 2011 to the governor of Pennsylvania and a candidate for mayor of Philadelphia.

In the SEC’s first case under pay-to-play rules for investment advisers, TL Ventures Inc. agreed to settle the charges by paying nearly $300,000.

Pay-to-play rules adopted in 2010 prohibit investment advisers from providing compensatory advisory services – either directly to a government client or through a pooled investment vehicle – for two years following a campaign contribution by the firm or certain associates to political candidates or officials in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets.

An SEC investigation found that TL Ventures violated pay-to-play rules by continuing to receive compensation from two public pension funds – Pennsylvania’s state retirement system and Philadelphia’s pension plan – within two years after an associate made a $2,500 campaign contribution to a Philadelphia mayoral candidate and a $2,000 campaign contribution to the governor of Pennsylvania. The mayoral position appoints three of the nine members of the Philadelphia Board of Pensions and Retirement. Therefore, a mayor can influence the hiring of investment advisers for the public pension fund. The 11-member board of Pennsylvania’s state retirement system includes six gubernatorial appointees. Therefore, a governor can influence the hiring of investment advisers for the public pension fund. After the contributions, TL Ventures improperly continued to receive compensation from the pension funds for those advisory services.

“We will use all available enforcement tools to ensure that public pension funds are protected from any potential corrupting influences,” said Andrew Ceresney, director of the SEC Enforcement Division. “As we have done with broker-dealers, we will hold investment advisers strictly liable for pay-to-play violations.”

LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, added, “Public pension funds are increasingly investing in alternative investment vehicles such as hedge funds and private equity funds. When dealing with public pension fund clients, advisers to those kinds of investment vehicles should be mindful of the restrictions that can arise from political contributions.”

The SEC’s orders instituting settled administrative proceedings also charged TL Ventures and an affiliated adviser Penn Mezzanine Partners Management L.P. with improperly acting as unregistered investment advisers. According to the orders, TL Ventures and Penn Mezzanine separately claimed to be exempt from SEC registration in March 2012, however their operations were closely integrated and significantly overlapped. Because they were not operationally independent of each other, TL Ventures and Penn Mezzanine should have been integrated as a single investment adviser for purposes of registration requirements or determining the applicability of any exemption.

The SEC’s order finds that TL Ventures violated Sections 203(a), 206(4) and 208(d) of the Investment Advisers Act of 1940 as well as Rule 206(4)-5. TL Ventures is ordered to pay disgorgement of $256,697, prejudgment interest of $3,197 and penalty of $35,000. TL Ventures agreed to be censured and to cease and desist from committing or causing any violations and any future violations of the provisions referenced in the order. TL Ventures neither admitted nor denied the findings in consenting to the SEC’s order.

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Four California Residents Charged in $12 Million Insider Trading Scheme

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission charged four Northern California residents with insider trading in Ross Stores stock options based on nonpublic information about monthly sales results leaked by one of the retailer’s employees.

The SEC alleges that Saleem Khan was routinely tipped by his friend Roshanlal Chaganlal, who was a director in the finance department at Ross headquarters in Dublin, Calif. Khan used the confidential information to illegally trade on more than 40 occasions ahead of the company’s public release of financial results. Besides trading in his own brokerage account, Khan traded in his brother-in-law’s account as well as an account belonging to another acquaintance. Khan also tipped his work colleagues Ranjan Mendonsa and Ammar Akbari so they too could trade in Ross stock options based on the nonpublic information. The insider trading resulted in collective profits of more than $12 million.

The SEC further alleges that at the outset of the scheme, Chaganlal gave $17,000 to Khan for the purpose of insider trading in Ross securities using the brother-in-law’s account. They attempted to disguise the exchange by using two cashier’s checks for $8,500 purchased in the name of Chaganlal’s wife of a different surname. Khan later funneled $130,000 of the generated trading profits back to Chaganlal by using third-party intermediaries. For example, Khan wrote Akbari a check for $35,000, and Akbari in turn wrote two checks totaling $35,000 to Chaganlal’s wife. Another $75,000 was routed in a roundabout way to a title company so it could be credited at closing toward Chaganlal’s purchase of a newly-built home.

“Khan and Chaganlal took advantage of confidential company data to systematically trade in Ross securities and reap millions of dollars in profits,” said Jina L. Choi, director of the SEC’s San Francisco Regional Office. “Even when insider traders try to conceal their profits and kickbacks by using other accounts and intermediaries, we’re committed to piecing together these widespread schemes and catching the perpetrators.”

According to the SEC’s complaint filed in federal court in San Francisco, Khan separately made approximately $450,000 in illicit profits by insider trading in stock options of software company Taleo Corporation ahead of its 2012 acquisition by Oracle Corporation. Khan began purchasing large numbers of options in Taleo six days before the merger announcement based on nonpublic information he received from an insider he knew at Oracle. Khan had never previously traded in Taleo securities.

The SEC alleges that the serial insider trading involving Ross securities began in August 2009 and continued until December 2012, when Chaganlal was terminated by the company. He had access to confidential sales figures on an internal webpage limited to a relatively small group of Ross employees. Chaganlal regularly communicated the confidential details to Khan so he could trade ahead of impending monthly sales announcements by Ross. Khan generated $5.4 million in profits in his own account, and $6 million in profits in his brother-in-law’s account. Khan’s supervisor Mendonsa made approximately $800,000 in insider trading profits based on the nonpublic information that Khan in turn tipped to him. Akbari made approximately $2,000 by insider trading on Khan’s illegal tips.

The SEC’s complaint names two relief defendants – Khan’s acquaintance Michael Koza and Khan’s brother-in-law Shahid Khan – for the purposes of recovering insider trading profits in their brokerage accounts through trades conducted by Khan. They each have agreed to settle the matter by paying the court the entire amount of insider trading profits remaining in their accounts, which total $240,741 for Shadid Khan and $31,713 for Koza.

The SEC’s complaint charges Saleem Khan, Chaganlal, Mendonsa, and Akbari with violating the antifraud provisions of the federal securities laws. The complaint seeks permanent injunctive relief, disgorgement of illicit profits plus interest, and financial penalties. The complaint also seeks an officer-and-director bar against Chaganlal.

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Chicago-Area Attorney Charged After SEC Exam Spots Fraud in Real Estate Investment Offering

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission charged the founder of an investment advisory firm located in suburban Chicago with defrauding investors in connection with a real estate venture for which his firm offered securities.

After an SEC examination of Kenilworth Asset Management LLC detected potential misconduct that was referred to the agency’s Enforcement Division, the ensuing investigation found that Robert C. Acri misled clients in the offer and sale of promissory notes issued for the redevelopment of a retail shopping center near Hammond, Ind. Despite saying the investments would specifically be used for this project and secured by a security interest in real estate, Acri misappropriated $41,250 of the proceeds for other uses and took no action to ensure that a security interest was recorded. Acri failed to disclose several other material facts to investors, including a primary purpose behind the investment offer – Kenilworth was attempting to rescue money that other Acri clients had previously invested in the developer of the same real estate project. Acri also concealed from investors that Kenilworth was to receive a five percent commission on each sale of notes.

Acri, a licensed attorney who lives in Winnetka, Ill., agreed to settle the SEC’s charges by disgorging the misappropriated investor funds and undisclosed commissions plus interest and an additional penalty for a total of approximately $115,000 in monetary sanctions. Acri also agreed to cease and desist from violations of the antifraud provisions of the federal securities laws and to be barred from the securities industry, from participating in penny stock offerings, and from appearing before the SEC as an attorney on behalf of any entity regulated by the agency. Acri resigned from Kenilworth in August 2012.

“Acri wasn’t honest with his clients and hid serious conflicts of interest from them while blatantly disregarding his fiduciary duty as an investment adviser,” said Robert J. Burson, senior associate regional director of the SEC’s Chicago office.

According to the SEC’s order instituting a settled administrative proceeding, Acri controlled Kenilworth’s bank accounts, hired employees, and made significant decisions about the firm’s policies, practices, and investment offers to clients. In early 2011, Acri decided to raise funds from Kenilworth clients for the Hammond, Ind., project when the project’s developer Praedium Development Corporation was unable to obtain financing from banks and other traditional lenders. As part of this effort, Praedium created a new entity Prairie Common Holdings LLC to issue the notes. One of Acri’s primary purposes for selling Prairie’s notes to Kenilworth clients was to give other Kenilworth clients who had invested in Praedium through a private fund several years earlier a chance to recover their money from that investment. Praedium had previously defaulted on a half-million-dollar loan from the private fund.

The SEC’s order finds that Acri purposely failed to disclose significant facts and conflicts of interest when offering the promissory notes to clients, who were not told about the prior loan or that Praedium and an affiliate had been delinquent in the payment of its mortgage, property taxes, and some contractor invoices. In fact, Acri did not even disclose that Praedium was the developer behind the Prairie project or that one of Praedium’s owners was having personal financial difficulties and was Acri’s personal friend.

According to the SEC’s order, Acri misappropriated $41,250 from the client funds that were supposed to be used to develop the Hammond, Ind. Project. Acri instead used that money to repay other clients and former clients, pay an individual to purportedly seek a loan for Praedium, and toward a settlement in a separate lawsuit that had been brought against him. Acri also did not inform investors about the $13,750 that Kenilworth received in commissions for selling the promissory notes.

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Bitcoin Entrepreneur Charged With Offering Unregistered Securities

As released by the United States Securities and Exchange Commission:

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

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

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

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

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

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

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

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New York-based Investment Adviser Charged with Defrauding Clients

As published by the U.S. Securities & Exchange Commission,

The Securities and Exchange Commission filed an emergency enforcement action to halt an ongoing fraud by an investment adviser based in Albany, N.Y., who is charged with lying to clients about the success of their investments while stealing their money for his personal use.

The SEC alleges that Scott Valente and his firm The ELIV Group LLC have fraudulently raised more than $8.8 million from approximately 80 clients by falsely claiming they achieve consistent and outsized positive returns among other misrepresentations about the safety of the investments. ELIV Group has in fact earned no positive results at all, instead sustaining consistent investment losses for the past three years. Meanwhile, Valente has been making substantial cash withdrawals of client funds and spending their money on his home improvements and mortgage payments as well as jewelry and a vacation condominium. Valente’s unsuccessful trading strategies and misappropriations have severely diluted the amount of client funds on hand at ELIV Group, and the SEC is seeking an asset freeze to halt the fraud as Valente continues to solicit new clients with his false claims. ELIV Group has offices in Albany and Warwick, N.Y.

“Valente used his one-man advisory firm to fraudulently lure unsuspecting investors in the Albany and Warwick communities to invest millions of dollars with him as advisory clients,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. “He said all the right things to make investors believe he was making the right investments and taking the right precautions with their money, but he was merely telling blatant false tales about the safety and success of the investments.”

Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York office, added, “Beyond the lies to his clients regarding his investment performance, Valente’s abuse of his fiduciary obligations included the theft of at least $2.66 million in client funds for personal spending, including hefty credit card bills, a vacation home, and jewelry.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Valente misleadingly told his clients that he has a 30-year record of investing experience “dedicated to the highest standards of service” and that he founded ELIV Group after leaving the “corporate financial industry” upon concluding there “had to be a better way for clients to achieve financial independence.” What he failed to disclose was that he twice filed for bankruptcy and started ELIV Group only after the Financial Industry Regulatory Authority (FINRA) permanently expelled him from the broker-dealer industry in 2009 for engaging in serial misconduct against numerous customers.

The SEC alleges that Valente and ELIV Group attracted clients by falsely assuring them that the principal amount of their investments was fully liquid and “guaranteed” because it was backed by a large money market fund. Client funds were in fact never guaranteed or backed by any money market funds, and the majority of ELIV Group’s investments were in highly illiquid investments in privately-held companies. Valente and ELIV Group also assured clients that the firm’s books and records were audited independently. However, ELIV Group never had an auditor, and the firm sent clients monthly investment reports in which they actually inflated the monthly returns, assets under management, and client account values.

The SEC’s complaint charges Valente and ELIV with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) as well as Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC is seeking a temporary restraining order to freeze their assets and prohibit Valente and ELIV from committing further violations of the federal securities laws. The SEC seeks a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest and pay financial penalties.

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Former CFO of Dallas-Based Jewelry and Collectibles Company Charged with Accounting Fraud

As released by the U.S. Securities and Exchange Commission:

The Securities and Exchange Commission filed accounting fraud charges against a Dallas-based company and its former chief financial officer for manipulating its inventory accounts.

The SEC alleges that I. John Benson made repeated false accounting entries that materially inflated the value of inventory on the balance sheets at DGSE Companies Inc., which buys and sells jewelry, diamonds, fine watches, rare coins, precious metals and other collectibles. Benson’s entries made it appear that DGSE owned certain inventory that actually still belonged to customers in consignment arrangements where DGSE held the goods on the owner’s behalf until they were sold. Benson then misled the company’s independent auditors about the journal entries, and DGSE subsequently overstated its inventory by anywhere from 99.1 percent to 227.4 percent in public filings during 2009, 2010, and 2011.

DGSE agreed to settle the SEC’s charges, and Benson agreed to a settlement in which he will pay a $75,000 penalty, be permanently barred from serving as an officer or director of a public company, and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

“Benson’s job as CFO was to protect the integrity of DGSE’s financial statements,” said David Woodcock, chair of the SEC Enforcement Division’s Financial Reporting and Audit Task Force and director of the Fort Worth Regional Office. “Instead he took advantage of DGSE’s weak internal control environment to intentionally manipulate its public filings.”

According to the SEC’s complaint filed in the Dallas Division of U.S. District Court for the Northern District of Texas, deficiencies in DGSE’s accounting systems and controls led to problems that significantly compromised the integrity of the company’s financial data. The deficiencies included the failure to properly record intercompany transactions such as inventory transfers between stores. As a result, DGSE’s intercompany accounts became out of balance by millions of dollars.

The SEC alleges that Benson subsequently made a number of fraudulent accounting entries in order to bring the intercompany accounts and DGSE’s general ledger as a whole back into balance. The entries resulted in a number of errors in DGSE’s financial statements including the large overstatement of DGSE inventory by millions of dollars. Benson concealed the improper entries by manipulating inventory detail listings to improperly reflect the consigned inventory as being owned by DGSE. Benson sent these listings to DGSE’s external auditor, and misled the auditor to believe the consigned goods were owned by DGSE. Benson then knowingly signed misleading public filings by DGSE, including annual reports for the 2009 and 2010 fiscal years as well as quarterly filings. Benson also signed false management certifications that were attached to these filings.

Benson is charged with violating the antifraud, reporting, recordkeeping, lying-to-accountants and internal controls provisions of the federal securities laws. DGSE is charged with reporting, recordkeeping, and internal controls failures. DGSE and Benson each consented to injunctions against future violations of these provisions. DGSE also agreed to the appointment of an independent consultant to review the company’s accounting controls, and DGSE has taken or agreed to take remedial steps to correct its deficiencies.

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Sarasota-Based Private Fund Manager Charged With Stealing Investor Money and Conducting Ponzi Scheme

As announced by the U.S. Securities and Exchange Commission:

The Securities and Exchange Commission charged a Sarasota, Fla.-based private fund manager with defrauding investors in a Ponzi scheme that ensued after he squandered their money on bad investments and personal expenses.

The SEC alleges that Gaeton “Guy” S. Della Penna raised $3.8 million from investors in three private investment funds that he operated. Investors were told their funds would be used to trade securities or invest in small companies. Despite depicting himself as a distinguished trader and profit-maker, Della Penna lost nearly all of their money by making unsuccessful investments and diverting more than a million dollars to himself for mortgage payments and money for his girlfriend. In an effort to cover up his fraud as it unraveled, Della Penna began operating a Ponzi scheme by using money from newer investors to pay fake returns to prior investors. He provided some investors with false account statements to mislead them into believing they were profiting by investing their money with him.

In a parallel action, the U.S. Attorney’s Office for the Middle District of Florida today announced criminal charges against Della Penna.

“Della Penna lied to investors about his trading track record in order to gain their trust and pocket their investments,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office. “He fostered a false sense of security by creating bogus account statements showing positive returns when, in reality, he was operating a Ponzi scheme and stealing investor money.”

According to the SEC’s complaint filed in the U.S. District Court for the Middle District of Florida, many of the investors in Della Penna’s scheme were acquaintances who he met through his church. He solicited investors to purchase notes in his private investment funds from 2008 to 2013, often promising 5 percent annual returns along with 80 percent of the trading profits generated with their investments. He later promised some investors 10 percent returns on their money to be used for investing in small companies. All the while, Della Penna was siphoning away investor funds to the tune of about $1.1 million to make mortgage payments on his 10,000-square-foot home and make payments to his girlfriend who lived with him there. Della Penna also transferred some investor funds into accounts at Gaeton Capital Advisors LLC, an entity that is named as a relief defendant in the SEC’s complaint for the purpose of recovering any investor funds in its possession.

The SEC’s complaint alleges that Della Penna violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8(a). The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and a permanent injunction against Della Penna.

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California-based Securities Salesman Charged with Selling Millions of Dollars in Securities without Registration

As published by the Securities and Exchange Commission:

The Securities and Exchange Commission charged a Tiburon, Calif.-based securities salesman for selling millions of dollars in oil-and-gas investments without being registered with the SEC as a broker-dealer or associated with a registered broker-dealer.

Behrooz Sarafraz has agreed to settle the SEC’s charges by paying disgorgement of his commissions, prejudgment interest, and a penalty for a total of more than $22 million.

“By failing to become associated with a registered broker-dealer, Sarafraz denied investors the protections of regulatory oversight and firm supervision,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office. “The SEC is committed to holding such unregistered salespeople accountable for their conduct.”

According to the SEC’s complaint filed in federal court in San Francisco, Sarafraz acted as the primary salesman on behalf of TVC Opus I Drilling Program LP and Tri-Valley Corporation, which were based in Bakersfield, Calif. From February 2002 to April 2010, these companies raised more than $140 million for their oil-and-gas drilling venture. While Sarafraz was raising money for these entities, he was not associated with any broker-dealer registered with the SEC.

The SEC’s complaint charges Sarafraz with violating Section 15(a) of the Securities Exchange Act of 1934, which requires securities salesmen to be associated with broker-dealers that are registered with the SEC.

According to the SEC’s complaint, Sarafraz worked full-time locating investors for the Opus and Tri-Valley oil-and-gas ventures. He described the investment program to investors and recommended they purchase Opus partnership interests or securities of Tri-Valley and its affiliated entities. In return, Sarafraz received commissions that ranged from seven to 17 percent of the sales proceeds that he and members of a sales network generated. The SEC alleges that Opus and Tri-Valley paid Sarafraz approximately $18.3 million in sales commissions. He paid approximately $1.9 million to others as referral fees and kept the remaining $16.4 million for himself.

Sarafraz has agreed to settle the SEC’s charges by consenting to entry of a final judgment ordering him to pay a total of $22,482,318.87 without admitting or denying the allegations. The sum consists of $16,406,459 in disgorgement, $6,075,859.87 in prejudgment interest, and a $50,000 penalty. The final judgment will also permanently enjoin him from violating Section 15(a) of the Exchange Act. The settlement is subject to court approval.

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New York-based Rafferty Capital Markets Charged with Illegal Facilitating Trades for a Non-Broker Dealer

As published by the Securities and Exchange Commission:

The Securities and Exchange Commission charged New York-based Rafferty Capital Markets with illegally facilitating trades for another firm that wasn’t registered as a broker-dealer as required under the federal securities laws.

Rafferty agreed to settle the SEC’s charges by disgorging all of the profits it received in the arrangement with the unregistered firm plus interest and a penalty for a total of nearly $850,000. The SEC’s investigation is continuing.

According to the SEC’s order instituting settled administrative proceedings, Rafferty agreed to serve as the broker-dealer of record in name only for approximately 100 trades in asset-backed securities that were actually introduced by the unregistered firm. While Rafferty held the necessary licenses and processed the trades, it was the unregistered firm that managed the business. Five of the firm’s employees became registered representatives with Rafferty but they performed their work in the offices of the unregistered firm, which retained sole authority over their trading decisions and determined their compensation. Rafferty had no involvement in the trading or compensation decisions while the registered representatives executed the trades through Rafferty’s systems on behalf of the unregistered firm. Based on the agreement, Rafferty kept 15 percent of the compensation generated by these trades and sent the remaining balance to the unregistered firm.

“Rafferty Capital Markets lent out its systems to a firm that tried to sidestep the broker-dealer registration provisions,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. “These provisions require those involved in trading securities to adhere to the proper regulatory framework, and registrants like Rafferty must face the consequences if they fail to think carefully and help unregistered firms avoid the rules.”

According to the SEC’s order, during the course of this arrangement from May 2009 to February 2010, Rafferty did not preserve communications with its registered representatives working on behalf of the unregistered firm. Rafferty did not ensure that the unregistered firm performed such recordkeeping duties either. Due in part to Rafferty’s lack of recordkeeping, one of the registered representatives was able to conceal two trades from Rafferty, which caused its books and records to be inaccurate.

The SEC’s order finds that Rafferty willfully violated Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3(a)(1) and 17a-4(b)(4). Rafferty also willfully aided and abetted and caused the unregistered broker-dealer’s violation of Section 15(a) of the Exchange Act. Without admitting or denying the findings, Rafferty consented to a cease-and-desist order that censures the firm and requires the disgorgement of $637,615 as well as payment of $82,011 in prejudgment interest and a $130,000 penalty.

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SEC Charges Three Sales Managers With Insider Trading Ahead of Major Acquisition

As released by the United States Securities and Exchange Commission:

The Securities and Exchange Commission charged three former sales managers at San Diego-based Qualcomm Inc. with insider trading ahead of a major acquisition announcement.

The SEC alleges that Derek Cohen, Robert Herman, and Michael Fleischli learned through work e-mails that Qualcomm was planning a big announcement. A sales meeting later revealed that Qualcomm was negotiating an acquisition of Atheros Communications. Armed with the nonpublic information, all three sales managers purchased Atheros securities while exchanging a series of suspiciously-timed phone calls. As news leaked about the impending acquisition and the two companies subsequently announced it in a joint news release, Atheros’ stock price jumped 20 percent. Cohen, Herman, and Fleischli sold their securities to realize quick profits.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California today announced criminal charges against Cohen and Herman.

“As alleged in our complaint, Qualcomm placed trust in these sales managers who proceeded to exploit the confidential information shared with them and conduct insider trading for their personal gain,” said Michele Wein Layne, director of SEC’s Los Angeles Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of California, Cohen and Herman live in San Diego and Fleischli lives in Newport Beach, Calif. Qualcomm had an insider trading policy that clearly explained that it was illegal for employees to trade securities while possessing material nonpublic information. Cohen, Herman, and Fleischli each acknowledged receipt of the Qualcomm insider trading policy included in the company’s code of business conduct.

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

The SEC’s complaint charges Cohen, Herman, and Fleischli with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks disgorgement of ill

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