SEC CHARGED BROKERAGE FIRM AND CEO OF FRAUD INVOLVING CDO AUCTIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

02/19/2015 11:00 AM EST

The Securities and Exchange Commission charged a New York City-based brokerage firm and its CEO with fraudulently deceiving other market participants while conducting auctions to liquidate collateralized debt obligations (CDOs).

An SEC investigation found that VCAP Securities and Brett Thomas Graham improperly arranged for a third-party broker-dealer to secretly bid at these same auctions on behalf of their affiliated investment adviser in order to acquire certain bonds to benefit the funds it managed.  Under engagement agreements with the CDO trustees, VCAP and its affiliates were prohibited from bidding while serving as liquidation agent for these auctions.  VCAP had access to all of the confidential bidding information as the liquidation agent, and Graham exploited it to ensure their third-party bidder won the coveted bonds at prices only slightly higher than other bidders.  VCAP’s investment adviser affiliate then immediately bought the bonds from its secret bidder.

VCAP and Graham agreed to pay nearly $1.5 million combined to settle the SEC’s charges, and Graham is barred from the securities industry for at least three years.

“Graham abused a position of trust by playing the roles of both conductor and bidder during CDO liquidation auctions to the detriment of other participants,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “The settlement requires Graham and VCAP to give up fees they obtained while conducting these unfair liquidations that landed certain bonds in their fund manager’s portfolio.”

According to the SEC’s order instituting a settled administrative proceeding, Graham and VCAP made material misrepresentations to the trustees of the various CDOs for which VCAP served as liquidation agent.  After Graham had discussed bidding arrangements with the third-party broker-dealer, VCAP and Graham falsely represented in engagement agreements that they and their affiliates would not bid in the auctions or misuse confidential bidding information.  VCAP provided the various trustees with documents that did not disclose that its investment adviser affiliate was actually the winning bidder.  VCAP’s scheme enabled the investment adviser affiliate to obtain a total of 23 bonds during five auctions.

The SEC’s order finds that VCAP and Graham violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  VCAP agreed to pay disgorgement and prejudgment interest of $1,149,599 while Graham agreed to pay disgorgement and prejudgment interest of $127,733 plus a penalty of $200,000.  The SEC’s order censures VCAP and requires the firm and Graham to cease and desist from committing or causing any future violations of Section 10(b) of the Exchange Act and Rule 10b-5.  VCAP and Graham consented to the SEC’s order without admitting or denying the findings.

The SEC’s investigation was conducted by the Complex Financial Instruments Unit and led by Sarra Cho and Christopher Nee with assistance from Kapil Agrawal and Alfred Day.  The case was supervised by Andrew Sporkin and Mr. Osnato.

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SEC CHARGES FORMER EXEC. OF FORTUNE 500 COMPANY WITH INSIDER TRADING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

02/19/2015 03:20 PM EST

The Securities and Exchange Commission announced insider trading charges against a former Fortune 500 company executive and his brother-in-law whom he allegedly tipped with nonpublic information ahead of the company’s merger.

The SEC alleges that while serving as vice president of construction operations at Baton Rouge-based The Shaw Group, Scott Zeringue traded company securities based on confidential information he learned on the job about an impending acquisition by Chicago Bridge & Iron Company.  In the weeks leading up to the public announcement of the merger, Zeringue purchased 125 shares of Shaw common stock and asked his brother-in-law Jesse Roberts III, a dentist who lives in Ruston, La., to also purchase Shaw stock on his behalf.

Zeringue, Roberts, and others subsequently tipped by Roberts allegedly made nearly $1 million in combined illicit profits after the merger announcement caused the price of Shaw stock to increase by more than 55 percent.

In a parallel action, the U.S. Attorney’s Office for the Middle District of Louisiana today announced criminal charges against Roberts.  Zeringue previously pled guilty to criminal charges and has agreed to settle the SEC’s charges by paying disgorgement of his ill-gotten trading profit of $32,006 plus a penalty of $64,012.  He will be prohibited from serving as an officer or director of a publicly-traded company for 10 years.  The settlement is subject to court approval.

“As charged in our complaint, Zeringue betrayed his duty to his company and its shareholders by tipping his brother-in-law with nonpublic information,” said Stephen L. Cohen, Associate Director in the SEC’s Division of Enforcement.   “Armed with this inside knowledge, Roberts loaded up on option contracts that he knew would earn him a huge but illegal profit.”

According to the SEC’s complaint filed in U.S. District Court for the Western District of Louisiana, the insider trading occurred in the summer of 2012.  Roberts reaped more than $765,000 through his illicit trading of call option contracts, and others made more than $154,000 from trading based on his tips.  Roberts rewarded Zeringue for the original tip by giving him $30,000 in cash in November 2013.  The SEC’s complaint charges Zeringue and Roberts with violations of the antifraud provisions of the federal securities laws.

The SEC’s continuing investigation is being conducted by Louis J. Gicale Jr. and Roger Paszamant under the supervision of Melissa A. Robertson.  The SEC’s litigation against Roberts will be led by Derek Bentsen.  The SEC appreciates the assistance of the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Middle District of Louisiana as well as the U.S. Secret Service, Internal Revenue Service Criminal Investigation, Options Regulatory Surveillance Authority, and Financial Industry Regulatory Authority.

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SEC CHARGES SALES EXEC. FOR ROLE IN FINANCIAL FRAUD INVOLVING CANADIAN ENERGY SERVICES BUSINESS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23191 / February 6, 2015

Securities and Exchange Commission v. Joseph A. Kostelecky, Civil Action No. 1:15-cv-00017-CSM (D.N.D.)

SEC Charges Sales Executive in North Dakota for Enabling Financial Fraud

The Securities and Exchange Commission today charged a former senior sales executive living in North Dakota for his role in a financial fraud that occurred at a Canadian oil-and-gas services company Poseidon Concepts Corp.

The SEC alleges that Joseph A. Kostelecky, who was the company's only senior executive in the U.S., was among those responsible for Poseidon's fraudulent reporting of approximately $100 million in revenues for contracts that were either non-existent or uncollectable. Poseidon's business in the U.S. was focused on renting above-ground fluid storage tanks for oil-and-gas hydraulic fracturing operations. According to the SEC's complaint filed in federal court in North Dakota, Kostelecky directed Poseidon's accounting staff to record revenues for inadequately documented transactions and made false assurances to several members of Poseidon's management in Canada that transactions with U.S. customers were valid and collectible. Poseidon consequently issued three quarterly financial statements from January to November 2012 with materially inflated revenues while its stock was trading in the U.S. and Canada. The magnitude of the overstatements was substantial, comprising approximately 64 to 72 percent of total revenues reported over the first three fiscal quarters of 2012.

When Poseidon later announced publicly that it would need to restate its financials due to the inflated revenues, its stock price collapsed and the company eventually filed for bankruptcy. Poseidon was based in Calgary and operated a subsidiary with offices in Denver and Dickinson, N.D., where Kostelecky still resides.

Kostelecky agreed to settle the SEC's charges by paying a $75,000 penalty and being barred from serving as an officer or director of a U.S. publicly-traded company. Without admitting or denying the SEC's allegations, Kostelecky consented to a final judgment enjoining him from violations of Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC's action against Kostelecky was filed in conjunction with an enforcement proceeding by the Alberta Securities Commission against Poseidon's senior management, including Kostelecky.

The SEC's investigation was conducted by Lee Robinson, Donna Walker, and Ian Karpel in the Denver Regional Office. The SEC appreciates the assistance of the Alberta Securities Commission.

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