SEC CHARGED FATHER AND SON WITH CONDUCTING SERIAL INSIDER TRADING VIA GOLF DISCUSSIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

05/14/2015 03:40 PM EDT

The Securities and Exchange Commission today charged a father and son in New York with conducting a serial insider trading scheme involving tips of key nonpublic information in coded e-mail messages disguised as discussions about golf.

The SEC alleges that Sean R. Stewart, currently a managing director at a prominent investment bank, routinely tipped his father Robert K. Stewart with confidential information about future mergers and acquisitions involving clients of two investment banks where he has worked during the past few years.  The elder Stewart, a certified public accountant and CFO of a technology company, cashed in on the tips by placing and directing highly profitable securities trades ahead of at least a half-dozen merger and acquisition announcements.  The scheme generated approximately $1.1 million in illicit proceeds in a four-year period.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against the Stewarts.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Robert Stewart recruited a trading partner to help him hide his illegal trading and the connection to his son as the source of the nonpublic information about investment bank clients.  Trades were conducted in the partner’s account, and the illicit profits were shared in the form small cash payments to Robert Stewart to avoid creating a clear paper trail of the kickbacks.  They also spread trades over numerous stock options series in an attempt to avoid raising red flags with regulators.

“Serial insider traders assume a huge risk that we will detect their pattern of trading and connect them to their source of confidential information,” said Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit.  “We have integrated new technological tools to quickly and easily identify relationships among traders and spot suspicious trading across multiple securities.”

According to the SEC’s complaint, there were additional ways that Robert Stewart and his fellow trader attempted to conceal the scheme and evade detection when sharing nonpublic information obtained from Sean Stewart about investment bank clients.  They primarily met in-person or used coded e-mail messages to discuss the scheme and trading plans.  Among examples of e-mail text using golf terminology were “saw local story about high cost of golf reservations since a foreign company purchased all- even more expensive than imagined” and “might have an opportunity to play golf- but would need to book the reservation as soon as the office opens Tuesday morning.”

The SEC’s complaint charges Sean and Robert Stewart with violations of the antifraud provisions of the federal securities laws.

The SEC’s investigation, which is continuing, has been conducted by Kelly L. Gibson, David W. Snyder, and John S. Rymas of the Market Abuse Unit in the Philadelphia Regional Office.  The case has been supervised by Mr. Hawke and Joseph G. Sansone, Co-Deputy Chief of the Market Abuse Unit.  The litigation will be led by David L. Axelrod, Regional Trial Counsel, and Catherine E. Pappas, Senior Trial Counsel, in the Philadelphia office.  The SEC appreciates the assistance of the U.S. Attorney’s Office in the Southern District of New York, Federal Bureau of Investigation, and Financial Industry Regulatory Authority.

Remarks at Veterans Committee Program: Wrapping Up Panelist Tribute to John P. Wheeler, III and Introducing the 2015 Winner of the John P. Wheeler Veterans Charity Award

Remarks at Veterans Committee Program: Wrapping Up Panelist Tribute to John P. Wheeler, III and Introducing the 2015 Winner of the John P. Wheeler Veterans Charity Award

Dissenting Statement Regarding Certain Waivers Granted by the Commission for Certain Entities Pleading Guilty to Criminal Charges Involving Manipulation of Foreign Exchange Rates

Dissenting Statement Regarding Certain Waivers Granted by the Commission for Certain Entities Pleading Guilty to Criminal Charges Involving Manipulation of Foreign Exchange Rates

SEC ALLEGES ITT EDUCATIONAL SERVICES CONCEALED POOR PERFORMANCE FROM INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23259 / May 13, 2015

Securities and Exchange Commission v. ITT Educational Services, Inc., Kevin M. Modany, and Daniel M. Fitzpatrick, Civil Action No. 1:15-cv-00758 (S.D. Indiana, Indianapolis Division, filed May 12, 2015)

SEC Announces Fraud Charges Against ITT Educational Services

On May 12, 2015, the Securities and Exchange Commission filed fraud charges against ITT Educational Services Inc., its chief executive officer Kevin Modany, and its chief financial officer Daniel Fitzpatrick.

The SEC alleges that the national operator of for-profit colleges and the two executives fraudulently concealed from ITT's investors the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed. ITT formed both of these student loan programs, known as the "PEAKS" and "CUSO" programs, to provide off-balance sheet loans for ITT's students following the collapse of the private student loan market. To induce others to finance these risky loans, ITT provided a guarantee that limited any risk of loss from the student loan pools.

According to the SEC's complaint filed in the U.S. District Court for the Southern District of Indiana, the underlying loan pools had performed so abysmally by 2012 that ITT's guarantee obligations were triggered and began to balloon. Rather than disclosing to its investors that it projected paying hundreds of millions of dollars on its guarantees, ITT and its management took a variety of actions to create the appearance that ITT's exposure to these programs was much more limited. Over the course of 2014 as ITT began to disclose the consequences of its practices and the magnitude of payments ITT would need to make on the guarantees, ITT's stock price declined dramatically, falling by approximately two-thirds.

The SEC's complaint alleges that ITT, Modany, and Fitzpatrick engaged in a fraudulent scheme and made a number of false and misleading statements to hide the magnitude of ITT's guarantee obligations for the PEAKS and CUSO programs. For example, ITT regularly made payments on delinquent student borrower accounts to temporarily keep PEAKS loans from defaulting and triggering tens of millions of dollars of guarantee payments, without disclosing this practice. ITT also netted its anticipated guarantee payments against recoveries it projected for many years later, without disclosing this approach or its near-term cash impact. ITT further failed to consolidate the PEAKS program in ITT's financial statements despite ITT's control over the economic performance of the program. ITT and the executives also misled and withheld significant information from ITT's auditor.

The SEC's complaint alleges that this conduct violated the antifraud, reporting, books and records, internal controls, lying to auditors and false certification provisions of the federal securities laws. The SEC's complaint also alleges that Modany and Fitzpatrick failed to comply with Section 304 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and civil monetary penalties. With respect to Modany and Fitzpatrick, the SEC also seeks officer-and-director bars and reimbursement pursuant to Section 304 of Sarbanes-Oxley.

The SEC's investigation has been conducted by Zachary Carlyle, Jason Casey, and Anne Romero with assistance from Judy Bizu. The case has been supervised by Laura Metcalfe, Reid Muoio, and Michael Osnato of the Complex Financial Instruments Unit. The litigation will be led by Nicholas Heinke, Polly Atkinson, and Mr. Carlyle.

SEC.gov | Remarks Before the Exchequer Club of Washington, D.C.

SEC.gov | Remarks Before the Exchequer Club of Washington, D.C.

FORMER BOA EXEC SENTENCED TO SERVE 26 MONTHS IN PRISON FOR CONSPIRACY AND FRAUD

FROM:  U.S. JUSTICE DEPARTMENT

FORMER BANK OF AMERICA EXECUTIVE SENTENCED TO SERVE

26 MONTHS IN PRISON FOR ROLE IN CONSPIRACY AND FRAUD INVOLVING INVESTMENT CONTRACTS FOR MUNICIPAL BOND PROCEEDS

WASHINGTON — A former Bank of America executive was sentenced today for his participation in a conspiracy and scheme to defraud related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced today.                                                                    

Phillip D. Murphy, the former managing director of Bank of America’s municipal derivatives group from 1998 to 2002, was sentenced to serve 26 months in prison by U.S. District Judge Max O. Cogburn Jr. of the U.S. District Court of the Western District of North Carolina.

On Feb. 10, 2014, Murphy pleaded guilty to participating in multiple fraud conspiracies and schemes with various financial institutions and brokers from as early as 1998 until 2006.  Bank of America and other financial institutions, acting as “providers,” offered a certain type of contract – known as an investment agreement – to state, county and local governments and agencies, and not-for-profit entities, throughout the United States.  These public entities sought to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects.  Public entities typically hire a broker to assist them in investing their money and to conduct a competitive bidding process to determine the winning provider.

“Individual accountability is the cornerstone of protecting the integrity of our financial markets,” said Deputy Assistant Attorney General Brent Snyder of the Antitrust Division’s Criminal Enforcement Program.  “This sentence is a result of our continued resolve to vigorously prosecute bank executives whose greed and illegal schemes undermine our free and fair financial markets.”

According to court documents, Murphy conspired with employees of Rubin/Chambers Dunhill Insurance Services Inc., also known as CDR Financial Products, a broker of municipal contracts, and others.  Murphy also pleaded guilty to conspiring with others to make false entries in the reports and statements originating from his desk, which were sent to bank management.  Murphy conspired with CDR and others to increase the number and profitability of investment agreements and other municipal finance contracts awarded to Bank of America.  Murphy won investment agreements through CDR’s manipulation of the bidding process in obtaining losing bids from other providers, which is explicitly prohibited by U.S. Treasury regulations.  As a result, various providers won investment agreements and other municipal finance contracts at artificially determined prices.  Murphy also submitted intentionally losing bids for certain investment agreements and other contracts when requested, and, on occasion, agreed to pay or arranged for kickbacks to be paid to CDR and other co-conspirator brokers.

In conjunction with the bid rigging, Murphy and his co-conspirators submitted numerous intentionally false certifications that were relied upon by both municipalities and the Internal Revenue Service (IRS).  These false certifications misrepresented that the bidding process had been conducted in a competitive manner that was in conformance with U.S. Treasury regulations.  These false certifications caused municipalities to award contracts to Bank of America and other providers based on false and misleading information.  The false certifications also impeded and obstructed the ability of the IRS to collect revenue owed to the U.S. Treasury.

“We trust those in positions of leadership and power to do the right thing when it comes to taking care of our money,” said Chief Richard Weber of the IRS’s Criminal Investigation.  “When that trust is broken through these types of criminal activities, than those individuals need to be held accountable.  Today's sentencing reflects our commitment to ensuring fairness for those engaged in these types of investments.”

“By knowingly exploiting vulnerabilities in the bidding process, Murphy ignored policies put in place to allow for the ethical distribution of municipal bond proceeds,” said Assistant Director in Charge Diego Rodriguez of the FBI’s New York Field Office.  “In the end, he brokered a deal that served his own best interests.  Today’s sentence is proof of our continued determination to root out those whose business practices contribute to the deterioration of healthy competition in the municipal bidding process.”

Including Murphy, 17 individuals and one corporation have been convicted or pleaded guilty as a result of the Antitrust Division’s municipal bonds investigation.

The sentence announced today resulted from an investigation conducted by the Antitrust Division’s New York Office, the FBI and IRS-CI.  The division also coordinated its investigation with the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.  The U.S. Attorney’s Office of the Western District of North Carolina provided valuable assistance in this matter.

The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force.  The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.  Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations.  Over the past three fiscal years, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants, including more than 2,900 mortgage fraud defendants.